Four Weeks to Validate the Recent Rally
The S&P 500 has assumed even more positive outcomes for growth and earnings in this latest run above 5,700 and new all-time highs, and the next three-to-four weeks in this market will prove whether those assumptions are correct (at which point these gains become further supported) or if they were too aggressive (at which point a minimum 5% pullback would likely occur).
With the S&P 500 trading above 5,700 on 2024 S&P 500 earnings of $273, the market is trading with a 21X forward multiple, a level that is not historically sustainable. So, to further justify these levels in stocks “whispers” are that 2024 S&P 500 EPS could rise to $277/share, reducing the multiple and making current levels still very expensive, but at least more justifiable.
Both the multiple and earnings growth estimates will be tested this month. A 20X-21X multiple, even with the Fed cutting rates, is only justifiable if economic data stays Goldilocks and does not hint at any further deterioration in growth. So, this week is very important because we will get the jobs report on Friday (remember that’s disappointed the last two months and caused volatility) and the ISM Manufacturing and Services PMIs.
While all of these numbers remain “fine” from a soft landing standpoint, they remain very close to suddenly turning more negative and if that were to happen, it would seriously invalidate the argument for a 20X or 21X multiple (and open up the possibility of a steep pullback or correction).
After this week’s data, focus will turn to Q3 earnings, with big banks kicking off the season in two weeks and critical technology and consumer companies reporting between now and the last week of October. Earnings results recently have been more mixed than outright good. If guidance isn’t great and jeopardizes the expected 10%-plus earnings growth from ’23 to ’24 that’s helping to underwrite these gains in stocks, then this market will be without critical support at these levels.
If you are not confused yet allow me to summarize, Fed rates cuts are nice but they cannot support markets at these levels and a 1) Perfectly Goldilocks economy and 2) Substantial earnings growth, are very aggressively priced into these markets and those two factors will determine if the S&P 500 can hold these very rich levels, or if we see some modest (or moderate) giveback in the coming weeks. Put differently, in the run to 5,700 the S&P 500 has assumed even more good things happening on growth and earnings. Now we’ve come to the critical data that must reinforce those expectations, otherwise these gains of the past two weeks will likely turn temporary.
September is typically a down month with October the start of the end of the year rally. Because of the gains of the past several months, this may not be the case. In addition, this is an election year with huge impact to the economy. Earnings in this environment is critical to the further growth in the market. Lots to digest, but the bottom line is that all is still pretty positive.
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