by: Stewart Fields, CFP®
The stock market has recently witnessed modest gains, continuing to set new records despite cautionary signals regarding its rapid ascend. Investors are carefully balancing robust economic indicators and potential corporate profit growth against concerns that the market's pace may be unsustainable.
A Turnaround from a Rocky Start
This year began uncertainly for equities, but optimism has taken hold as investors anticipate the Federal Reserve's potential interest rate cuts. Additionally, the surge in artificial intelligence technology is expected to continue bolstering profit growth across various sectors. The spotlight is now on the earnings season, as major companies like Netflix Inc., Tesla Inc., and Intel Corp. prepare to announce their financial results.
Mark Hackett of Nationwide observes the momentum following the recent record-high breakout. He notes the positive market environment, highlighting the strategic disadvantage of holding too much cash in such times.
Market Metrics in Focus
The S&P 500 index is hovering around 4,850 points, while the yield on 10-year Treasury notes has slightly declined to 4.10%. The U.S. dollar remains stable. Post-market hours saw United Airlines Holdings Inc. announce expected annual profits surpassing analysts' forecasts, an encouraging sign despite a first-quarter loss.
Shifting Investor Sentiment
David Donabedian of CIBC Private Wealth US points out a shift in investor sentiment. Initially, optimism was fueled by expectations of aggressive rate cuts by the Fed. Now, there's a growing belief in the economy's resilience, suggesting it can withstand higher interest rates without significant negative impacts.
A Closer Look at Valuations
The recent peak in U.S. stock valuations mirrors those of last July, but Citigroup Inc.’s Scott Chronert suggests that the market may not be as overvalued as it appears. This is partly due to the performance of major tech giants like Apple Inc., Microsoft Corp., and Nvidia Corp., among others. When considering an equally weighted version of the S&P 500, which reduces the disproportionate impact of these large companies, the valuation appears more reasonable.
Solita Marcelli of UBS Global Wealth Management emphasizes the ongoing importance of AI in driving global tech stocks. She sees continued opportunities in the semiconductor and software sectors, particularly in areas related to memory and AI edge-computing.
Indicator-Based Forecasts
The Ned Davis Research Leading Indicator Model, a composite of 10 indicators typically leading the S&P 500, remains mostly bullish. However, signs of weakening in some areas like financials and volume demand suggest a more nuanced outlook.
Lisa Shalett of Morgan Stanley Wealth Management cautions that despite high forward multiples and ambitious earnings forecasts, stock gains could plateau in 2024. This potential stagnation may result from better earnings being offset by lower valuation multiples, typical in a midcycle or soft-landing economic scenario.
The Fed's Influence and Economic Resilience
As the S&P 500 reaches new heights, analysts and money managers are weighing U.S. economic strength against Federal Reserve officials' reluctance to reduce interest rates prematurely. A significant portion of market participants surveyed by Bloomberg Markets Live Pulse view early monetary easing bets as potentially misguided for 2024.
Differing Views from Wall Street Banks
Goldman Sachs Group Inc. and JPMorgan Chase & Co. offer contrasting perspectives on profit margins. Goldman Sachs anticipates inflation decline to boost margins, while JPMorgan warns of diminishing pricing power among companies.
Anticipating the Fed's Moves
Yung-Yu Ma of BMO Wealth Management predicts a brighter stock market outlook in the latter half of the year, anticipating the Fed's rate cuts to commence. This environment, coupled with a favorable spending outlook for companies and consumers, could bolster the market.
“We believe the Fed will cut rates just three or four times in 2024,” Ma notes, emphasizing the importance of the general downward trajectory of short-term interest rates over the specific number of cuts. He predicts a particularly favorable backdrop for stocks by the end of 2024, with growth acceleration and low inflation.
Conclusion: A Delicate Balancing Act
In summary, the stock market presents a complex landscape. On one hand, there's optimism driven by technological advancements and potential Federal Reserve policy changes. On the other, there's caution due to elevated valuations and the uncertain impact of future economic policies. As companies start reporting their earnings, investors will be keenly watching for signs that can either validate the current optimism or warn of potential overextension in the market.
By: Stewart Fields, CFP®