Expectations for rate cuts have moderated -- does this spell trouble for stocks?
Expectations for rate cuts in 2024 have moderated since the beginning of the year. Based on the CME FedWatch Tool, the current expectation is for three 0.25% rate cuts in 2024 with the first cut occurring in June. This is down from expectations at the start of the year for six rate cuts with the first reduction occurring in March. One might expect the revisions since the start of the year would spell trouble for equities, but stronger than expected economic data has helped propel the market while calming fears regarding an imminent recession.
Real GDP increased 2.5% in 2023 and economists tracked by Bloomberg now expect real GDP to grow more than 2% in 2024, reflecting the view that the risks of a near term recession are remote. Regardless, the Fed appears ready to step in upon signs of a meaningful downturn in the economy while fiscal policy also remains stimulative, helping support risk appetite.
Through early March, the S&P 500 is up approximately 8% this year. The narrative remains largely the same as a year ago with large cap technology stocks driving the gains, helping the relative performance of the market cap weighted S&P 500. A look at the equal-weighted S&P 500 index paints a less cheery picture, as it trails the cap-weighted index by about 3%. However, it is worth noting that this difference is less pronounced than in 2023.
Interestingly, we have also seen some divergence in performance amongst the “Magnificent Seven” this year, with Meta up more than 40% and Nvidia up nearly 80%, while Tesla is down about 30% and Apple has declined approximately 10%. In a sign of broadening equity market participation, every sector of the S&P 500 has posted gains over the past month.
Markets continue to reflect a “risk-on” mentality. In addition to the well-known run Nvidia has been on, Super Micro Computer, another AI beneficiary with a market capitalization of more than $50 billion, is up more than 300% since the start of the year.
Reflecting the bullish sentiment, multiples remain elevated relative to history. The forward P/E multiple is currently 21x versus the 10-year average of just under 18x. Earnings for the S&P 500 are expected to grow 11% in 2024 following just 2% growth in 2023. Early expectations for 2025 reflect robust 13% earnings growth, helping to support the elevated current multiple.
Given the recent market strength It is easy for investors to get concerned about the possibility of a near-term pullback. However, history would suggest things work out well over the longer term for patient investors that focus on and stay invested in growing companies with reasonable valuations like our two picks in the April 2024 issue of the Investor Advisory Service newsletter
The first company covered by our analysts is a midsized financial services company that is tied to the booming travel and transportation industry and has plenty of tailwinds to help its stock fly.
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The commentary is excerpted from the issue of the Investor Advisory Service newsletter published at the end of March. To receive commentary like this in a more timely matter and receive actionable stock ideas each and every month, subscribe today. The Investor Advisory Service stock newsletter was named to the Hulbert Investment Newsletter Honor Roll for the 14th consecutive year for outperforming every up and down market cycle since 2007
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