The current market rally, which has lifted the S&P 500 to multiple all-time highs this year, will face its toughest test in several months as earnings season draws to a close and the Federal Reserve continues to preach patience on rates. short-term interest. rate cuts.
Analysts, however, see more upside to the broader measure of U.S. blue-chip stocks, noting that while much of the current gains have been driven by just a handful of mega-cap tech stocks , parallels to the Internet bubble of the early 2000s are less accurate than comparisons to the bull market seen in the 1990s.
stocks from that era began a 12-year streak of impressive gains, including a nearly six-fold rise for the S&P 500, despite the Federal Reserve's relatively high rates and a still-developing global economy.
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The nascent launch of the Internet, along with faster advances in telecommunications and related technologies, fueled a boom in corporate productivity that helped stocks navigate through the higher-rate environment, analysts argue.
Party like it's NOT 1999
“Thoughts of the mid-1990s are creeping into today's stock market, as during that time the ensuing productivity boom boosted stocks for years despite relatively high interest rates,” Yung-said. Yu Ma, chief investment officer at BMO Wealth Management.
“We would say we are in the early stage of the benefits of ai in improving productivity,” he added. “The current hype may be a little more advanced than what ai can offer in the near term to increase productivity, but so far, the hype hasn't gotten unhinged.”
Citigroup analyst Scott Chronert is also bullish on the stock, but wants to see the current surge in ai infrastructure spending translate into revenue and growth drivers.
That kind of fundamental support, he and his team argue, will be key to the stock reaching the bank's S&P 500 year-end bullish target of 5,700. But he notes that the current rally shouldn't be viewed as a bubble, given that valuations are notably lower than during the height of the dot-com era.
Related: Big tech stocks are doubling down on ai
JP Morgan's Marko Kolanovic, however, says market performance and near-term forecasts are too closely linked to the so-called Goldilocks scenario of moderating growth and slowing inflation, and he worries that growing pressures on prices may delay Fed interest rate cuts even later in the year.
“The bulls are largely basing their “constructive market call on the assumption that corporate earnings will accelerate, but earnings reality could prove the opposite as the year progresses,” JP Morgan analysts noted in a Monday report.
“Corporate profit margins are high in a historical context and appear to be peaking,” the bank added. “Historically, profit margins always start to decline before the next economic crisis.”
Earnings growth crucial to bullish thesis
With about 448 S&P 500 companies reporting so far, fourth-quarter earnings are forecast to rise 10% from a year ago to $476.3 billion share-weighted, and earnings for the entire the year increase by 9.5% compared to 2023 levels.
In fact, Barclays strategist Venu Krishna raised his full-year earnings forecast for the S&P 500 to $235 per share (a $2 improvement from his previous estimate, but still below the $260 level). dollars per share tied to Citi's $5,700 S&P 500 target) thanks to some of the current technological dominance.
“The new forecast reflects our view that inflation will continue to normalize as long as the economy remains relatively resilient and that Big tech will maintain the lead,” Krishna wrote.
“We believe Big tech's earnings exceptionalism justifies a premium multiple for the group, while we see the S&P 500 ex-tech trading roughly in line with fair value amid easing headwinds in against inflation and a more superficial restart of economic growth,” he added.
Related: S&P 500 Hits All-Time Highs on Fed Risks and Bond Market Signals
Two other drivers of stock market gains this year could come from excess cash building up both on the margins of the investment world and in the corporate coffers of America's biggest companies.
Adam Turnquist, chief technical strategist at LPL Financial, sees broader economic resilience, as well as easing inflationary pressures and a shift in Fed rate policy in late spring, will fuel the case for easing. buyback of corporate shares.
Turnquist expects overall buybacks to rise about 13% from last year, to $885 billion, and adds that companies that execute share buybacks tend to outperform their broader benchmarks.
“Over the past 20 years, the S&P 500 buyback index has outperformed the S&P 500 71% of the time, accumulating an average annual return of 11%,” he said. “This compares to the S&P 500's average annual return of 8.9% over the same period.”
More economy:
- Fed members have just anticipated what the future of interest rates will be
- Falling retail sales clouds impact of inflation data
- Shocking employment report: 353,000 hires crush forecasts and fuel inflation fears
Meanwhile, assets in global money market funds surpassed the $6 trillion mark for the first time earlier this month, driven in part by high short-term interest rates and manager reluctance. of funds to bet on a prolonged rally in US stocks.
Total assets in money market funds have reached a record $6 trillion, increasing by $1.2 trillion over the past year and nearly doubling over the past five years. pic.twitter.com/nfsWrInmJa
—Charlie Bilello (@charliebilello) February 26, 2024
However, the Fed's summer rate cuts and a pullback in Treasury yields could see a good chunk of cash flow back into stocks over the second half of the year, adding more fuel to price targets. bullish.
This is a Teflon stock market, showing a remarkable ability to shed bad news and focus on the positive, which is classic bull market behavior, noted Yung-Yu Ma of BMO Wealth Management.
Related: A veteran fund manager picks his favorite stocks for 2024
