The stock market rallied for the first six and a half months of 2024, with the S&P 500 index hitting records for 38 sessions before stalling.
It has fallen 3% to 5,494 from its all-time high on July 16.
The outlook for stocks going forward is unclear, and the August consumer inflation report did not clarify things. The consumer price index rose 2.5% year-over-year, the lowest level since February 2021.
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However, excluding food and energy prices, the index gained 3.2%, unchanged from July. The Fed has a 2% inflation target, but relies on a different indicator.
In any case, most experts agreed after the report that the Fed would cut interest rates by 0.25 percentage points at its meeting next week. Some had previously predicted a half-point cut.
So what does a 0.25 percentage point rate cut mean for stocks? The optimistic view is that the move will stimulate the economy and thus boost corporate profits.
The bearish view is that a rate cut signals the economy is weakening, which is bad for earnings.
What's happening to corporate profits?
Let's take a look at the earnings picture. S&P 500 earnings per share rose 11.3% in the second quarter from a year earlier, the highest level since the fourth quarter of 2021, according to FactSet.
Related: Veteran fund manager sees Warren Buffett's moves as worrying
Analysts are predicting earnings growth of 4.9% for the third quarter, which is not bad given the strong second quarter. But some experts say the slowing economy will prevent such a strong showing.
In any case, many experts argue that the market is overvalued. On September 6, the S&P 500 was trading at 20.6 times analysts' earnings estimates for the next 12 months, according to FactSet. This figure exceeds the five-year average of 19.4 and the ten-year average of 18.
Bears also cite the effect of September on stocks. The month typically brings bad news for investors. The S&P 500 has fallen 1.2% on average in September since 1928, according to Dow Jones Market Data.
This is the worst monthly performance of the calendar. The index has faltered in 56% of Septembers.
Related: Major research firm reveals fourth-quarter stock market forecast
Doug Kass is a little optimistic about stocks
TheStreet Pro columnist Doug Kass He has been bearish on the stock for months. He has worked as a hedge fund manager since the 1970s, including a stint as head of research for Omega Advisors, legendary investor Leon Cooperman.
The recent weakness in many stocks makes some of them attractive buying candidates, Kass said. wrote in his column September 11th.
“Investors have ignored many stocks and they have performed much weaker than average,” he said. “This is fertile ground for my long-term picks.”
According to Kass, his concerns about market fundamentals are slowly being accepted as market consensus. That could be a contrarian bullish indicator for stocks. Falling interest rates should also support stocks.
The fund manager buys and sells:
- Cathie Wood scoops up $8 million worth of shares in failing tech companies
- A high-value fund manager says Alphabet, Google's parent company, is a great value stock
- Morgan Stanley reveals its top stock picks, including Nvidia
Kass said his earlier concerns reflected the prospects of slowing global economic growth and persistent inflation, massive U.S. debt and elevated valuations. “While I remain concerned about equity markets, I am less so now.”
Kass is not wedded to a positive or negative view of the market. “As a contrarian, armed with a sense of intrinsic values, I am willing to buy weakness and sell strength,” he said.
The most important element of his Sept. 11 column is that “I fully acknowledge that stocks outperform any other asset class over long periods of time,” Kass said.
Among his favorite stocks are media and entertainment giant Disney. (DIS) and oil producer Occidental Petroleum (OXYGEN) .
The author owns shares in Disney.
Related: Veteran fund manager sees world of trouble ahead for stocks
