Corporate Earnings: The Linchpin for Continued Market Growth in 2024
U.S. stocks have enjoyed a remarkable election-year rally in 2024, evoking memories of 1976, which saw a similarly robust market performance. Investors are now closely monitoring inflation and economic growth data to predict the Federal Reserve’s future interest-rate decisions and evaluating corporate earnings for the second half of the year to assess whether this rally can sustain its momentum.
The S&P 500 (SPX) is poised for its best first-half election-year performance since 1976 and the second-best in election year history, based on Dow Jones Market Data. Despite this, analysts from Ned Davis Research caution that current valuations appear overstretched, sentiment is overly optimistic, and the market is overbought.
Several factors contribute to the potential vulnerability of the U.S. stock market in the latter half of the year. Key among these are corporate earnings projections, the uncertainty surrounding potential interest-rate cuts by the Federal Reserve, and the limited scope of the market rally. While earnings forecasts have been revised upwards, predicting a growth of 12% to 13% for 2024, the rapid rise in valuations is a cause for concern, according to Sam Stovall, Chief Investment Strategist at CFRA.
Stovall emphasizes the need to determine whether rising stock prices and price-to-earnings ratios reflect genuine expectations of better earnings. Investors are awaiting the second-quarter earnings season, which will provide crucial data to validate these expectations.
Inflation remains a significant concern for investors. The interplay between inflation and economic growth data will heavily influence the Federal Reserve’s decisions on interest rates. William Northey, Investment Director at U.S. Bank, notes that while the Fed has predicted only one rate cut for the remainder of the year, fed-funds futures traders are anticipating two cuts starting in September, as indicated by the CME FedWatch Tool.
A pivotal data release next week is the personal-consumption expenditures (PCE) price index, scheduled for Friday. James Ragan, Director of Wealth-Management Research at D.A. Davidson, expects the PCE figures for May to confirm a slowing inflation trend, which was already evident in the earlier consumer price index data.
Stovall concurs, predicting that both the headline and core PCE inflation figures will show a decline from the previous month, potentially benefiting the stock market. Economic growth data is another critical focus, with market expectations of a slowdown in U.S. GDP growth, albeit still in positive territory. Ragan suggests that weaker economic data might not necessarily harm the market, as it could prompt the Fed to expedite rate cuts. He remarks, “Bad news is good news — as long as it’s not too bad news.”
For the stock market rally to continue, a broader participation across different sectors is essential. Northey highlights that the rally so far has been driven predominantly by megacap tech companies like Nvidia Corp. (NVDA), buoyed by their significant earnings growth and enthusiasm around artificial intelligence.
The S&P 500’s 14.6% year-to-date gain has largely been powered by the information-technology sector, which has surged 28.7%, and the communication-services sector, up 24.8%, according to FactSet data. Ragan points out that a more sustainable rally would require better performance from cyclical sectors such as energy, financials, materials, and industrials. Monitoring these sectors closely could provide insights into the rally’s longevity.
U.S. stocks ended the past week on a high note, with the Dow Jones Industrial Average (DJIA) rising 561.17 points, or 1.5%, to 39,150.33. The S&P 500 increased by 33.02 points, or 0.6%, to 5,464.62, while the Nasdaq Composite (COMP) closed up 33.02 points, or 0.6%, at 5,464.62.
Looking ahead, investors will also be focused on several important economic indicators next week, including new consumer-confidence data on Tuesday, new home-sales data on Wednesday, and initial jobless claims numbers on Thursday. These data points will provide further insights into the health of the economy and the potential trajectory of the stock market.
Key Takeaways
Historic Election-Year Rally: U.S. stocks are experiencing their best election-year rally since 1976.
Valuation Concerns: Current market valuations are stretched, raising concerns about sustainability.
Inflation and Fed Rate Cuts: Persistent inflation and economic growth data will influence the Fed’s interest-rate decisions.
Corporate Earnings: Improved earnings estimates are essential for sustaining the rally.
Sector Performance: Broader participation from various sectors is needed for a more sustainable rally.
Conclusion
The 2024 election year has thus far been a stellar one for U.S. stocks, but the sustainability of this rally remains uncertain. Investors must keep a close eye on inflation data, Federal Reserve policy, and corporate earnings to navigate the potential challenges ahead. Broader sector participation and positive economic growth will be crucial in determining whether the market can maintain its upward trajectory.
