Market Update
The strong momentum in markets to close out last year has continued through the first quarter. While last year’s rally was met with skepticism, and the general feeling that the “other shoe” just hadn’t dropped yet, investor sentiment has improved this year. Fortunately, strong corporate earnings growth has helped justify some of the uptrend, but a good portion of the recent gains have been due to optimism around AI boosting labor productivity. It’s healthy to get anxious about market rallies when sentiment becomes overwhelmingly positive, but Jerome Powell’s recent remarks further fueled market optimism by reiterating that rate cut plans remained intact despite stronger than anticipated US economic growth.
All that being said, second quarter earnings are fast approaching and could prove the bulls right, or give markets a breather in what is likely to be a turbulent election year. In the Fed’s quest to bring us back to “normal” financial conditions, it’s important to remember that “normal” for the stock market comes with the expectation of a 10% pullback about once a year1 and, while we still think it’s going to be a decent year, we are overdue for some volatility.
For those who want more detail, below is an analysis/summary of market drivers, and various investor concerns, we are monitoring.
As always, don’t hesitate to give us a call if you would like to discuss anything in more detail!
-Shirley, Didier, Eric, Jaci & Tom
AI Earnings vs Hype: during fourth quarter earnings calls for S&P 500 companies, 179 companies mentioned “AI” and nine of those companies mentioned AI more than 50 times during their call2. For reference, there are only 65 companies in the “information technology” sector in the S&P 500. Considering that companies that mentioned AI in earnings calls had an average rise of 28.6% over the last 12 months, vs 16.8% for companies that didn’t mention AI, it’s hardly surprising that more companies are using the “magic words3.” While there is unquestionably a lot of hype, and some overvaluation, the “magnificent 7” stocks have seen earnings grow five times faster than the rest of the S&P 500 over the last 4 years4. Despite more than doubling their earnings growth over the last 4 years, their earnings growth still hasn’t kept pace with the surge in prices10.
Fed Policy & US Economy: it’s been just over 2 years since the first Fed rate hike. While it’s been a painful 2 years, inflation has come down mercifully quickly and the beginning of the rate cutting cycle is within sight. Markets expect the first rate cut to occur in June and are aligned with the Fed’s forecast of 3 rate cuts by year end. Markets started this year pricing in 6 rate cuts, but the stronger than anticipated economic growth has since aligned investors with the Fed’s view that prematurely
cutting rates, and loosening financial conditions, could reignite inflation. The biggest market mover over the last 2 years has been Fed press conferences, but with peak rates likely behind us, we hope that economic fundamentals, rather than policy, will once again take center stage in a long awaited “normalized” environment.
Year End Targets: coming up with a year-end target for the S&P 500 is one of the least enviable tasks analysts have. As of March 20th, the median street analyst consensus for a year-end S&P 500 target was 5,642.535, which would imply an approximately 18% gain for the 2024. However, it’s worth noting that analyst estimates tend to follow the market trend and will adjust downwards if we see Q1 earnings disappoint.
Bonds: after the last 5 years, it’s hard to have much faith in the bond market’s ability to produce consistent low-risk returns. For 2021 and 2022, the 10-year US Treasury bond, which is widely used as a benchmark for high quality US debt, fell a cumulative -22.25%6. For context, that’s more than twice as bad as any other 2-year time frame in the last 100 years6. For a single year worse than 2022 for US treasury bonds, we have to go back to the onset of the Civil War in 18607. However, since rates peaked last fall, we’ve seen the bond market’s correlation with the stock market drop, and a return to much less volatility. Until the Fed sets its rate cutting glidepath, there could be some policy surprises that temporarily jolt markets, but the trend towards a more “normalized” experience for bond investors looks good. We’re very much looking forward to what’s supposed to be the boring part of portfolios become boring again.
Why Don’t Markets Ever Seem “Normal?”: given the last 5 years, it’s not surprising this question has come up more frequently. The truth is that markets are never “normal” at any specific point in time. While markets are discussed in terms of long-term data and averages, day-to-day, they are experienced dynamically. The entire point of markets is “price discovery”, which just refers to the process through which buyers and sellers of a given asset help determine a reasonable price for said asset. Due to information becoming easier to access (maybe too easy), markets have become structurally more volatile over the last 20 years as investors are constantly trying to take the torrent of global financial information into account8. However, while daily swings in the market have become more pronounced, the longer term return trends that we depend on for financial planning haven’t changed much9. Hopefully, the below chart showing the stability of the average 30-year return line for the S&P 500, vs each 1-year return, is encouraging:
Any opinions are those of the members of the Stoneman Dalton Group and not necessarily those of Raymond James. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Past performance does not guarantee future results. Keep in mind that individuals cannot invest directly in any index. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market.
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1: https://www.nasdaq.com/articles/bull-markets-pullbacks-and-corrections
4: https://www.wisdomtree.com/investments/blog/2024/02/21/magnificent-seven-earnings-mostly-impress
6: https://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html
9: https://awealthofcommonsense.com/2023/07/one-year-returns-dont-matter/
10: https://www.capitalgroup.com/advisor/ca/en/insights/articles/magnificent-seven-chart-diversify.html
