The S&P 500 stock index is up over 25% since the end of October and, excluding the half dozen mega-caps at the top of the S&P 500, the rest have shown no earnings growth over the interim. The entire gain results from rising price/earnings ratios (P/Es). For most of this year, 10-year Treasury yields have hovered between 4.0% and 4.3%. Thus, the stock market gains so far this year are not earnings related, and they are not interest rate related. They are momentum related reflecting investor optimism.
While stock market returns in 2023 were largely the result of the Magnificent Seven, performance broadened out somewhat in the first quarter of 2024. The Equal Weight S&P 500 still lags the market-cap weighted index by nearly three percentage points year-to-date, but it has hit an all-time high, and 85% of the S&P 500 stocks are now above their 200-day moving average price.
Certainly, the stock market has climbed the proverbial Wall of Worry.
The Ukraine and Israel wars rage on, tensions between China and the U.S. are on the rise, and a clash over Taiwan can’t be ruled out in the foreseeable future.
The danger of shipping in the Red Sea has rerouted over 2,000 ships since early November. There are no signs of this abating.
A developing crisis in the Venezuela-Guyana border dispute appears to be getting worse. In short, Venezuela claims to have “annexed” territory from its much smaller neighbor, Guyana. The disputed region happens to include one of the world’s largest oil caches.
Grid regulators and utilities are ramping up warnings of a looming electric-grid crisis. Projections for U.S. electricity demand growth over the next five years have doubled from a year ago. The Wall Street Journal lists the major culprits: new artificial-intelligence data centers, federally subsidized manufacturing plants, and the government-driven electric-vehicle transition.
One of the most contentious presidential elections in U.S. history is approaching, with both sides of the political divide fearing unusually dire consequences should they lose.
On Friday, it was announced that the core personal consumption expenditures (PCE) data, on a six-month annualized basis, accelerated to 2.9%, the fastest since July. The figures corroborate other measures of inflation that showed price pressures intensified at the start of the year. Fed Chair Jerome Powell has stressed the need for patience, saying the timing of the first rate cut would be “highly consequential.” Policymakers will have access to one more PCE report, as well as others on consumer and producer prices and employment, before their next meeting starts on April 30.
First quarter earnings reports will also begin in a couple of weeks and will provide some additional insight into cost pressures facing companies and how those are impacting profit margins. The current consensus for the S&P 500 first quarter earnings is for 3.5% year-over-year growth. In the midst of this background, our equity research continues to focus on owning high-quality businesses that are innovating and sharing their financial success with their shareholders.
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