The Bull Market Resumes Despite Challenges
After encountering temporary setbacks in recent months, the bull market has regained momentum, driving stocks to record highs last week. This resurgence occurred despite ongoing headwinds that have intensified in recent times.
Interest rates remain elevated compared to previous years, presenting challenges for those seeking to borrow money or refinance debt. On the short end of the yield curve, expectations for Federal Reserve rate cuts have diminished, signaling a more hawkish stance that has fueled concerns among market bears.
The US dollar has also appreciated significantly against many major foreign currencies, creating obstacles for US-based multinational corporations with significant operations overseas.
Additionally, valuation metrics such as the price-to-earnings (P/E) ratio suggest that the stock market is relatively expensive compared to historical levels. Higher interest rates, fewer Fed rate cuts, a strengthening dollar, and elevated valuation ratios have been cited by market experts as reasons for caution.
Reasons for Optimism
Despite these challenges, there are several reasons to explain why the stock market trended higher last week. The market may anticipate that these headwinds will be short-lived or offset by other tailwinds. Alternatively, the market may simply be irrational at present and poised for a correction in the near future.
Crucially, earnings growth remains a significant driver of stock prices. Most companies have reported positive earnings that exceeded expectations in the first two weeks of the Q4 earnings season. Analysts forecast continued robust profit margins, supporting a favorable outlook for earnings growth.
Macroeconomic Developments
* Card spending remains strong, with Chase Consumer Card data indicating a 4.8% increase year-over-year.
* Consumer sentiment has declined slightly, potentially influenced by political factors.
* Home sales are increasing, with a 2.2% gain in December.
* Home prices continue to rise, with a 6.0% increase from December 2023 to $404,400.
* Mortgage rates have ticked lower, providing some relief for potential homebuyers.
* Unemployment claims have increased slightly but remain at historically low levels.
* Office occupancy rates are gradually recovering.
* Surveys indicate a cooling of economic growth, although soft survey data tends to overstate actual conditions during periods of stress.
* GDP growth estimates remain positive.
Conclusion
The long-term outlook for the stock market remains positive, driven by expectations for continued earnings growth. Demand for goods and services remains robust, and the economy continues to expand. While some challenges exist, the economy is in a healthy state, with positive job creation and a shift in Federal Reserve focus towards supporting the labor market.
Investors should monitor hard economic data, which has diverged from weaker sentiment-oriented data. Positive operating leverage due to cost structure adjustments by companies is contributing to robust earnings growth.
While risks remain, investors should focus on the long game, as the stock market has historically overcome challenges and continued to trend higher.