Market hits new highs amid resilience

Rule of 20, which says market is fairly valued when S&P 500's P/E and CPI y/y add to 20, continues to suggest stocks look expensive pic.twitter.com/C4H6AYTILq

— Liz Ann Sonders (@LizAnnSonders) October 11, 2024

The stock market continues to hit new highs, with the S&P 500 up more than 21% so far this year. The index has rebounded from an August swoon and is up about 65% since bottoming out in September 2022. Kristy Akullian, head of iShares investment strategy, Americas, at BlackRock, says, “We’ve been surprised to the upside by how resilient equity markets have been, even in the face of a lot of volatility over the last few weeks.” She points to uncertainty surrounding fiscal stimulus in China, rising geopolitical tensions, and a neck-and-neck presidential election in the United States.

S&P 500 at new highs with VIX >20? Seems to have many upset for some reason.

Since 1990 (when VIX data starts) S&P 500 has made 720 new all-time highs.

106 of those happened when the VIX closed >20.

That is 14.7% of all ATHs.

Yes, it is rare, but maybe not as odd as seems.

— Ryan Detrick, CMT (@RyanDetrick) October 11, 2024

Despite stretched valuations, recent technological sector weakness, and fears of a consumer spending slowdown, the market has taken it all in stride. Strategists say a surprisingly strong economy has given investors confidence and helped send stocks higher, but they also warn that trouble during earnings season could disrupt the bull run. “The most important thing about why every market has stayed so strong, even in the face of so many uncertainties, is that economic data has surprised to the upside,” Akullian explains. “The conversation about a recession, at least in the near term, is really off the table.”

A yr ago the S&P 500 was up 'only' 21.0% and all we heard was how this one of was the weakest first yr to a new bull ever and it meant it was due to end.

We pushed back and said no, year 2 will play catch up.

Now up 62.6% and in line with the avg bull two years in at 58%. pic.twitter.com/IZXE9lZuDH

— Ryan Detrick, CMT (@RyanDetrick) October 11, 2024

Inflation has fallen dramatically over the past year, and recent labor market data has been healthy, easing investor worries about a significant slowdown in hiring. Consumers are still spending, wages are growing, and corporate profits have remained resilient. Add Federal Reserve interest rate cuts to the mix, and you have a recipe for the powerful gains seen over the past two months. Yung-Yu Ma, chief investment officer at BMO Wealth Management, notes: “As far as the market can see, we’re going to have the Fed [as a] tailwind. That provides a lot of encouragement and emboldening of positions.” Ma expects upcoming interest rate cuts to boost the economy again as companies accelerate spending. Growing confidence about the economy’s path and interest rates has sparked a recent rotation away from tech stocks into value and smaller capitalization stocks. After two years of eyewatering gains, large-cap growth stocks returned just 2.2% in the third quarter, while large-cap value stocks gained 8.8%. Bryant VanCronkhite, senior portfolio manager at Allspring Global Investments, calls this a positive development. “You want a better distribution of return across a wider group of companies,” he says, indicating a healthier market and a more durable rally. Chief US strategists believe that tailwinds from declining interest rates, moderating inflation, easing monetary policy, and recent stimulus measures announced by the Chinese government will support stocks despite the slowing economic growth rate. Earnings season is now underway, with big banks reporting their third-quarter results.

Market’s surprising resilience persists

Corporate profits have remained robust overall despite headwinds from inflation, high interest rates, and geopolitical uncertainty. Strategists warn that any major hiccups could spook markets. “If we get a couple of weeks into earnings season and have some high-profile misses, I think that could derail things,” says James Ragan, director of wealth management research at DA Davidson. Analysts broadly believe companies in the US Market Index grew their earnings by a collective 4.3% in the third quarter, according to FactSet estimates. Investor enthusiasm surrounding AI has sent tech stocks soaring over the past two years. Companies are investing heavily in this technology, but investors worry about when exactly all that spending will begin paying off. “Eventually, these early winners have to justify the expenses” through new revenue streams or expanded margins, says VanCronkhite. Akullian adds that if investors hear earnings guidance that raises concerns, the market could falter due to the heavy weighting of tech stocks within the major indexes. Still, many analysts remain bullish on AI. For example, following Advanced Micro Devices’ earnings, an equity strategist wrote: “AMD’s line of sight into data center buildouts suggests that no AI chip bubble is imminent.” Ma agrees, saying that tech giants with deep pockets aren’t likely to back away from AI any time soon. Nothing is ever certain when it comes to stocks. A soft landing is coming into view, but it’s also possible that the economy will weaken. This nonstandard cycle, compared to history, makes predicting the future murky. Strategists recommend a balanced approach to navigate the unknown factors, including the economy’s path, the outcome of the presidential election, and geopolitical developments. “What’s important going forward is being diversified,” says Akullian, who still sees plenty of opportunity in the stock market. While the mega-cap tech trade may have worked in the past, investors should expect the composition of returns to look different in the months ahead. Ragan advises to “stick with high quality. Stick with companies with a little bit more visibility for continued earnings growth.”