For all the noise and nuance in the market, this bullish mantra is still intact: No hard landing, Fed cutting rates sooner than later (by May), inflation declining, earnings growth holding up.
For this rally to end, one of those four statements must be false and despite the nuance in last week’s data, none of it was enough to prove any of those statements false, and as such, the S&P 500 rallied to fresh all-time highs. That said, it is also true that the data is starting to hint at an inflection point. Here’s what I mean: There is a growing list of indicators that’s implying economic growth is starting to moderate, so while a hard landing isn’t likely, momentum is slowing.
On the Fed, yes it will cut rates, but the market remains (likely) too aggressive on its expectation barring a sudden growth slowdown. So, the Fed is dovish, but it’s not clear just how dovish. On the earnings front, on aggregate the Q4 season is keeping 2024 S&P 500 estimates between $240-$245/share, but corporate America is facing headwinds on margins and revenues they haven’t seen since before the pandemic. So, how does one allocate to a market like this?
Watch for more evidence of an inflection (that’s our job) but until then, enjoy the ride and stay focused on the four bullish factors fueling this rally: Solid growth, a turning dovish Fed, falling inflation, growing earnings. Again, until one of those are disproven (and they will be at some point, they always are) then momentum can carry this market higher.
Yes, valuations are absolutely beyond justifiable terms. And yes, this market is ripe for a 10% or more correction when one of those four factors are disproven. For now, these hints of inflection are not enough to break the bullish mantra or momentum. Our job is to keep watching these risks and tell you, as soon as possible, when one of those bullish factors is disproven, because at that point this market will be ripe for a pullback, and possibly a sizeable one. For now I do not see a downturn last long so we will not be repositioning during that downturn. If I see something that would change my mind, you will be informed a head of time.
From an allocation standpoint, this week was very similar to 2023 where AI-linked, mega-cap tech drove the S&P 500 higher Friday. I do not think, however, that’s a sustainable trend.
Prior to Friday, lower volatility ETFs and value sectors/factors were trading in line and even slightly outperforming the S&P 500. One third of our AXIOM portfolio is hedged with value and that has proven the right move. I think that value move can continue because the totality of the data tells me that Friday’s jobs report was an outlier, that economic growth is plateauing, and the economy isn’t set to reaccelerate.
Again, earnings is the key indicator of further moves in the market. In April we will get the first quarter earnings numbers and that will determine the moves in the summer.
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