Why This Market Is So Resilient (Again)
The S&P 500 traded to within striking distance of the previous all -time highs, all but erasing the soft jobs report and yen unwind declines of late July and early August, and this rebound has been fueled by three factors. First, solid economic data that has pushed back against the growth fears emanating from the soft July jobs report. Second, The Fed declaring it is going to start a rate cut cycle at the September meeting, finally fulfilling market expectations. Third, generally “fine” earnings/corporate commentary.
Each factor has helped to push stocks higher over the past three weeks and if they continue this week, via a solid jobs report and dovish Fed speak, then the S&P 500 can (and likely will) trade to a new all-time high. And, if this continues and the Fed “sticks” a soft landing (something we won’t know for a few more months) the S&P 500 could trade as high as 5,900-6,000, based on a 22 multiple and $270-$275 S&P 500 earnings.
If economic data stays solid (but not great) the Fed is aggressive on its rate-cutting cycle (100 bps in ’24) and corporate earnings remain strong (boosting expectations to $275/share), the S&P 500 at 6,000 shouldn’t be a shock. However, amidst all this optimism the reality is the market wants to go higher and it is ignoring any news that doesn’t force it to consider negative alternatives.
Case in point, last week, we saw the most important stocks in the market, including NVDA, fail to rally on earnings for the first time in several quarters and if this market loses AI leadership, the path higher will get difficult even in a solid macroeconomic environment. Additionally, Japanese CPI was hotter than expected and BOJ officials said they’d need to continue to hike rates (albeit it gradually). Finally, corporate earnings were fine on the actual EPS measurement but there were more retail and consumer spending red flags, as Dollar General (DG) essentially warned the lower end consumer is tapped out.
Companies have been fighting revenue headwinds over the past few months but beating earnings via cost controls and margins. However, if that falters, or revenue headwinds become more powerful, that will be a material negative.
Here’s the bottom line: The news of the past three weeks has been positive, but the market is priced as though a soft landing, aggressive Fed rate cuts and extraordinary earnings growth are guaranteed. They are not guaranteed, and the totality of the actual news isn’t as good as the equity market would imply. And it’s important to keep that context because if the market is forced to realize that (like the July jobs report forced it to back in early August) then another 5%-ish air pocket in the S&P 500 shouldn’t be a surprise. But that is not a reason to get out as it poses a small blip in the upturn.
As we near the election, most pundits predict no matter who wins the markets will be up as is the case in most elections. I am not sure I agree. There is a clear difference in economic policy and that poses a risk to the markets. We will see.
"This material is provided for general information and is subject to change without notice. Every effort has been made to compile this material from reliable sources however no warranty can be made as to its accuracy or completeness. The information does not represent, warrant or imply that services, strategies or methods of analysis offered can or will predict future results, identify market tops or bottoms or insulate investors from losses. Past performance is not a guarantee of future results. Investors should always consult their financial advisor before acting on any information contained in this newsletter. The information provided is for illustrative purposes only. The opinions expressed are those of the author(s) and not necessarily those of Geneos Wealth Management, Inc.