2024 has been an absolutely monster year for the stock market, currently posting year to date gains of 23%. If the market ends the year up over 20%, this would be the second year in a row of doing so. In 2024, the S&P 500 has closed at record levels 47 times and is currently on a six week winning streak in terms of gains.This has been great news for investors, however, some argue that the market has risen too far and is in need of a correction.
The main reasons for this negative outlook are rising geopolitical tensions, potentially lackluster quarter three earnings, the upcoming presidential election, and end of year volatility. Although there may be some merit to these factors, there are several factors that could cause the market to continue higher.
For starters, we have just kicked off the third quarter earnings season and despite prior skepticism, companies in the S&P 500 have been killing it. Of the 70 companies in the S&P 500 that reported earnings last week, 75% of the reports were better than analyst expectations. Analysts are expecting this to continue, and they are also forecasting strong reports from firms outside of the “Magnificent Seven”. This means that they are expecting strong earnings across the market, not just in the most heavily weighted sectors of the S&P 500.
Another reason is that the market is currently in a period of strength and expansion. The Fed’s September rate cuts, and prospective rate cut in November, has eased monetary conditions, allowing investors and consumers to be more comfortable putting their capital to work. In addition to this, the labor market is strong with low layoffs and solid wage increases, GDP is increasing, rate cuts are breathing life back into the housing market, and inflation is slowly making its way back towards the Fed’s goal of 2%. The economy is looking solid in terms of growth, rate cuts are a big part of this. The Fed cut rates by 50 basis points in September, this should induce more spending, lending, and borrowing across the economy, which is good for growth. It is also pretty clear that the threat of a recession or hard landing for the economy has been avoided, Adam Parker of Deutsche Bank wrote, “The longer growth stays outright strong around a 5% nominal level, the more investors are likely to accept that the economy has indeed landed and at a higher level than they were anticipating. The former fundamental condition is positive for risk assets, and the latter shifting perceptions is as well.”
Election results could also be very strong for public equity markets. No matter who wins the election, they are going to increase the national deficit. Increased government spending has a tendency to pump money into U.S. stocks.
U.S. companies also appear to be getting more and more profitable. Improving margins and revenues have bolstered financials and growth. This trend may continue or even accelerate as interest rates decrease and the cost of doing business gets cheaper. We are also still barely scratching the surface of how artificial intelligence can boost productivity and efficiency, over time this could greatly impact company financials. Adam Parker wrote, “If a large company like McKesson or Walmart comments on labor productivity, we could see another material leg up in the equity market because investors will rightly interpret margin expansion for many more companies down the line,” Greater efficiency and productivity equals improved margins.
All in all, nothing is ever going to be definitive, but the data can point us in the right direction. Although the market has been on a historic run the last two years, that doesn’t mean it has to stop, it has several factors that could cause it to continue higher. One thing to remember is that bull markets tend to last longer than bear markets.
Comments