The Rule of 20 indicates that the market is considered fairly valued when the P/E of the S&P 500 combined with the year-over-year CPI equals 20, and it still points toward potentially overvalued stocks. pic.twitter.com/C4H6AYTILq
— Liz Ann Sonders (@LizAnnSonders) October 11, 2024
The stock market continues its ascent, with the S&P 500 increasing over 21% this year alone. After rebounding from a downturn in August, the index has risen approximately 65% since its low in September 2022. Kristy Akullian, the lead of iShares investment strategy for the Americas at BlackRock, comments, “We’ve been pleasantly surprised by the strength of equity markets, despite significant volatility in recent weeks.” She highlights the uncertainty regarding China’s fiscal stimulus, escalating geopolitical issues, and an incredibly close presidential race in the U.S.
The S&P 500 reaches new heights while the VIX is above 20? This seems to have upset many.
Since 1990 (the starting year for VIX data), the S&P 500 has achieved 720 new all-time highs.
Out of those, 106 were recorded when the VIX was above 20.
This represents 14.7% of all all-time highs.
While it’s indeed infrequent, perhaps it’s not as peculiar as it seems.
— Ryan Detrick, CMT (@RyanDetrick) October 11, 2024
Regardless of high valuations, recent declines in the technology sector, and concerns over a potential slowdown in consumer spending, the market appears unfazed. Analysts attribute the continued surge in stocks to a surprisingly strong economy that has instilled confidence in investors, though they caution that earnings season may introduce volatility. “The key reason why the market remains robust, despite numerous uncertainties, is that economic data has continually surpassed expectations,” Akullian elaborates.
“Discussions about a recession, at least in the immediate future, are largely irrelevant.”
A year ago, the S&P 500 was ‘only’ up 21.0%, and all we heard was that this was one of the weakest first years of a new bull market and that it was bound to end.
We disagreed, stating that year 2 would compensate.
Now it’s up 62.6%, consistent with the average bull market two years in at 58%. pic.twitter.com/IZXE9lZuDH
— Ryan Detrick, CMT (@RyanDetrick) October 11, 2024
Inflation has significantly decreased over the last year, and recent job market statistics have been positive, alleviating concerns about a drastic hiring slowdown. Consumer spending remains steady, wages continue to rise, and corporate earnings have shown resilience. With potential interest rate cuts from the Federal Reserve, the past couple of months have demonstrated strong market gains.
Yung-Yu Ma, chief investment officer at BMO Wealth Management, observes, “As far as the market can perceive, the Fed is going to act as a supportive force. This brings considerable optimism and bolsters positions.” Ma anticipates that upcoming interest rate reductions will further stimulate the economy as companies enhance their spending. Growing confidence in the economy’s trajectory and interest rates has led to a recent shift from tech stocks to value and smaller stocks.
Following two years of extraordinary returns, large-cap growth stocks registered a mere 2.2% in the third quarter, in contrast to large-cap value stocks that surged by 8.8%. Bryant VanCronkhite, a senior portfolio manager at Allspring Global Investments, describes this shift as a positive indicator. “A better distribution of returns across a broader array of companies is desirable,” he remarks, suggesting a healthier market and a more sustainable rally.
Leading U.S. strategists believe that falling interest rates, decreasing inflation, relaxed monetary policies, and fresh stimulus measures rolled out by the Chinese government will continue to backstop stocks, even as economic growth moderates. The earnings season has commenced, with major banks releasing their third-quarter figures.
Market’s unexpected durability continues
Overall, corporate profits have remained strong despite challenges posed by inflation, high-interest rates, and geopolitical instability. Analysts caution that any major disruptions could unsettle the markets. “Should we encounter a few weeks into earnings season with some major misses, that might disrupt momentum,” warns James Ragan, director of wealth management research at DA Davidson.
Analysts generally project that companies within the U.S. Market Index saw a collective earnings growth of 4.3% for the third quarter, based on estimates from FactSet. The investor excitement around AI technologies has fueled tech stock surges over the last two years. Despite heavy investments in this technology, investors are apprehensive about when the returns on this expenditure will materialize.
“In time, these early successes need to validate their spending with new revenue channels or improved margins,” VanCronkhite notes. Akullian adds that any concerning earnings guidance could hinder the market, given technology stocks’ prominence in major indices. Nevertheless, many analysts maintain a positive outlook on AI.
For instance, in response to Advanced Micro Devices’ earnings report, an equity strategist noted, “AMD’s visibility regarding data center expansions suggests that an AI chip bubble is not on the horizon.” Ma concurs, indicating that sizeable tech companies with substantial resources are unlikely to retreat from AI investments soon. While the path forward remains unpredictable, a moderate economic recovery seems plausible, though economic strains could very well emerge.
This atypical cycle relative to historical norms complicates future predictions. Analysts advocate for a diversified investment strategy to manage unpredictable elements such as the economy’s trajectory, the outcome of the presidential elections, and geopolitical occurrences. “The priority going forward should be diversification,” states Akullian, who still perceives ample opportunities within the stock market.
While the significant large-cap tech investments may have been fruitful in the past, investors should brace for a different return landscape in the upcoming months. Ragan encourages investors to “prioritize high-quality stocks. Focus on companies with clearer visibility toward sustained earnings growth.”
