Robust global economic growth could provide enough support for stocks to proceed a record-breaking rally, even when bets on Federal Reserve rate of interest cuts are completely abandoned this 12 months.
After the most effective week for the S&P 500 index since November pushed the U.S. stock index back toward its record highs set in March, investors are left wondering whether the weakness seen earlier this month was only a blip or whether it represents a delayed easing If monetary policy eases, the market will return down.
The answer, in accordance with some investors, lies in market activity within the Nineteen Nineties, when the worth of stocks greater than tripled although rates of interest remained at current levels for years. Back then, robust economic growth provided the platform for brilliant stocks, and although the worldwide outlook is currently more uncertain, there continues to be enough momentum to drive the stock market forward.
“You have to consider why there might be fewer rate cuts this year,” Zehrid Osmani, fund manager at Martin Currie, said in an interview. “If it is related to the economy being healthier than expected, that could support the stock market recovery after the typical volatile short-term reactions.”
Ahead of last week’s gains, stocks had taken a breather throughout April after initial expectations of policy easing in the ultimate months of 2023 sparked record-breaking rallies in U.S. and European stock markets.
Traders’ expectations that the Fed would make a minimum of six rate cuts of 25 basis points each this 12 months in early January have since been reduced to simply one US inflation The rate of interest stays high, raising concerns that continued restrictive policies would weigh on the economy and corporations’ earnings potential.
Increasing geopolitical risks and uncertainty over the end result of worldwide elections have also led to a rise in volatility, boosting demand hedges This would offer protection if the market experiences a sharper fall.
Nevertheless, confidence in the worldwide economy has strengthened this 12 months, largely as a consequence of US growth and up to date signs of economic weakness Recovery in China. So did the International Monetary Fund this month increased his prognosis for global economic growth, while a Bloomberg survey shows euro zone growth is anticipated to select up from 2025.
While recent economic data reflected a pointy increase Weakening of US economic growth In the newest quarter, those numbers must be “taken with caution” as they mask otherwise robust demand, said David Mazza, CEO of Roundhill Investments.
“Overall, I still believe we don’t need rate cuts to return to a more optimistic mood, but I do think it will be more difficult,” Mazza said.
Some near-term decline is taken into account healthy for the S&P 500 after its rally to an all-time high in the primary quarter. According to data compiled by Bloomberg, the index fell as much as 5% several times between 1991 and 1998 before rallying again, but didn’t correct by 10% or more.
A shortcoming of the comparison is that the index is far more concentrated today than it was within the Nineteen Nineties.
The current top five stocks – Microsoft Corp., Apple Inc., Nvidia Corp., Amazon.com Inc. and Meta Platforms Inc. – are all within the technology sector and account for nearly 1 / 4 of market capitalization, making them more vulnerable to exiting the index stronger fluctuations.
However, there are other aspects that bode well for stocks.
An evaluation by BMO Capital Markets found that S&P 500 returns are inclined to correlate with higher yields. Since 1990, the index has averaged annual gains of nearly 15% when the 10-year Treasury yield was above 6%, compared with a return of seven.7% when the yield was below 4%, the evaluation found.
“This makes sense to us because lower interest rates can be a reflection of sluggish economic growth and vice versa,” Brian Belski, BMO’s chief investment strategist, wrote in a note to clients.
Last week, 10-year Treasury yields hit a one-year high of 4.74% amid limited prospects for monetary easing.
Initial results from the present reporting season indicate that around 81% of US firms are exceeding expectations, even within the face of increased rates of interest. According to data compiled by Bloomberg Intelligence, first-quarter earnings are expected to rise 4.7% year-on-year, compared with the preseason estimate of three.8%.
Analysts expect S&P 500 earnings to rise 8% in 2024 and 14% in 2025 after subdued growth last 12 months, data compiled by BI show.
The profit forecast could possibly be even higher next 12 months if there are zero rate of interest cuts in 2024, said Andrew Slimmon, portfolio manager at Morgan Stanley Investment Management.
That “confirms upside potential for stocks” because the market looks to those forecasts, he said said Bloomberg Television earlier this month.
A booming economy will proceed to support stocks even without rate of interest cuts, Bank of America Corp. strategist Ohsung Kwon said. The biggest danger to that premise is that the economy will slow while inflation stays high, he said.
“If inflation remains stubborn due to the dynamics of the economy, that’s not necessarily bad for stocks,” Kwon said. “But it is stagflation.”
