Is the Bullish Mantra Still Working?
Earlier in 2024, we identified a “bullish mantra” that investors were repeating that was the driving force behind the substantial 2024 rally and new highs, and the four parts of that bullish mantra were: Solid economic growth, declining inflation, sooner-than-later Fed rate cuts and AI enthusiasm. So, let’s update these parts to see if they are all still valid (because if they are, the rally can continue and downside risks are limited for now.
Bullish Mantra 1: Solid Growth. Markets expect the Fed to cut rates once or twice this year, but the truth is that “higher-for longer” rates (especially compared to the 2010s) are here to stay. The only reason that hasn’t hit stocks is because growth remains solid, so in many ways this is the most important part of the bullish mantra. Still Valid? Yes. Clearly there’s been some loss of growth momentum. But the economy was so strong that even that moderation of growth isn’t enough to spook investors, yet, although this is something that must be watched closely (and we will).
Bullish Mantra 2: Falling Inflation. Inflation has declined considerably from the highs of two years ago and that drop in inflation has increased expectations for Fed rate cuts, which has pressured Treasury yields and helped stocks rally. Still Valid? Yes. The latest inflation data showed clearly that disinflation (the decline in inflation) has resumed and that’s increasing expectations for September rate cuts.
Bullish Mantra 3: Sooner-Than-Later Fed Rate Cuts. When we started 2024, markets expected a March rate cut and numerous rate cuts in 2024. Now, they expect one and maybe two cuts in 2024. The reason that hasn’t hit stocks is partly because the exact date of the first cut isn’t that important. What’s important is that markets believe the Fed will cut sooner than later (meaning they aren’t on hold for quarters or years and that there’s no chance of a rate hike). Still Valid? Yes. Fed officials have all but removed a rate hike as a possibility for policy and they aren’t openly pushing back against the market’s outlook for one or two hikes in 2024.
Bullish Mantra 4: AI Enthusiasm. The earnings and psychological impact of the AI explosion, which really began in earnest just over a year ago, has been an integral part of the rally in stocks as the current levels of the S&P 500 aren’t justifiable via more traditional valuation metrics. It’s AI enthusiasm that’s powered the markets higher and ignited some “animal spirits” amongst investors and despite concerns about an AI bubble, the bottom line is that earnings growth is largely matching high expectations. Still Valid? Yes. NVDA just became the most valuable company in the world (surpassing MSFT) and that underscores that AI enthusiasm remains alive, well and raging! Beyond that one example, recent AI-related tech company earnings have been strong and despite concerns, the actual earnings growth around AI companies (especially chip and cloud companies) remains extremely strong.
Bottom Line There remains a lot of noise in this market about economic growth, inflation, earnings, the Fed, geopolitics and soon, the election. But, for all the noise, the facts remain as such: The bullish mantra that has powered stocks higher since the start of the year (and really since November of last year) remains intact. And as long as that’s the case, then the downside risks for this market will remain limited.
That said, we do continue to worry about growth, not so much because I think the economy is going to suffer a material recession, but instead because, at these valuations, investors aren’t even accounting for a true moderation in growth. And the recent data clearly implies that’s a real possibility in the coming months and quarters. That’s why I continue to favor maintaining long exposure in stocks but, at the same time, maintaining a small exposure to value stocks. I continue to look for the best fit in the value stocks as seen in my recent moves in the AXIOM accounts, but I will until we get closer to the election, maintain that exposure.
For now, enjoy the summer heat and enjoy family.
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