Robust global economic growth could provide equities with enough support to resume their record rally even if bets that the Federal Reserve will cut interest rates this year are scrapped entirely.
After the S&P 500’s best week since November pushed US stocks back to record levels seen in March, the question facing investors is whether the weakness seen earlier this month was just a blip, or whether delayed policy easing will lead to a fall. S&P 500 index. The market went down again.
The answer, according to some investors, lies in the market scenario of the 1990s, when stock prices more than tripled despite rates hovering around current levels for years. Robust economic growth then provided a platform for equities to rise, and while the global outlook is more uncertain at the moment, there is still enough momentum to push the stock market forward.
“You have to evaluate why you might end up in a scenario where there are fewer rate cuts this year,” Zehrid Osmani, a fund manager at Martin Currie, said in an interview. “If this is due to the economy being healthier than expected, it could support a rally in stock markets after typical volatile knee-jerk reactions.”
Before last week’s rally, stocks had been taking a breather throughout April from initial expectations of policy easing that set off a record rally in U.S. and European stock markets in the final months of 2023.
Traders’ expectations of at least six 25 basis point Fed cuts this year in early January have since dwindled to one as Inflation in the USA remains elevated, raising concerns that prolonged restrictive policies will put pressure on the economy and potential company earnings.
Growing geopolitical risks and uncertainty surrounding the outcome of global elections have also led to a sharp increase in volatility, stimulating demand for hedge this will provide protection in case the market sees a sharper decline.
However, confidence in the global economy has strengthened this year, driven mainly by US economic growth and recent signs of economic growth. rebound in China. Likewise, the International Monetary Fund this month raised his forecast for global economic growth, while Bloomberg research shows eurozone growth is expected to accelerate from 2025.
Although recent economic data reflects a sharp US economic growth slowdown Last quarter, those numbers should be taken “with a grain of salt” as they mask otherwise robust demand, said David Mazza, chief executive officer of Roundhill Investments.
“Overall, I remain convinced that we don’t need rate cuts to get back to a more optimistic mood, but I think it will be even more difficult,” Mazza said.
Some near-term pullback is considered favorable for the S&P 500 after it rose to an all-time high in the first quarter. The index fell as much as 5% several times between 1991 and 1998 before embarking on new rallies but failed to correct by 10% or more, according to data compiled by Bloomberg.
One downside to the comparison is that the index is much more concentrated now than it was in the 1990s.
The current top five stocks are Microsoft Corp., Apple Inc., Nvidia Corp., Amazon.com Inc. and Meta Platforms Inc. – all belong to the technology sector and make up almost a quarter of the market capitalization, leaving the index. vulnerable to sharper fluctuations.
However, there are other factors that bode well for the stock.
An analysis by BMO Capital Markets found that S&P 500 returns tend to correlate with higher returns. The analysis found that since 1990, the index has averaged an annual gain of nearly 15% when the 10-year Treasury yield was above 6%, compared with a return of 7.7% when the yield was below 4%.
“This makes sense to us because lower rates can reflect sluggish economic growth and vice versa,” Brian Belsky, chief investment strategist at BMO, wrote in a note to clients.
The 10-year Treasury yield hit a one-year high of 4.74% last week amid limited prospects for policy easing.
Early results from the current earnings season suggest that about 81% of US companies are beating expectations even amid higher rates. First-quarter earnings are expected to rise 4.7% from a year ago, compared with the preseason estimate of 3.8%, according to data compiled by Bloomberg Intelligence.
Analysts expect S&P 500 earnings to rise 8% in 2024 and 14% in 2025 after subdued growth last year, data compiled by BI shows.
Profit forecasts could be even higher next year if there is zero rate cuts in 2024, said Andrew Slimmon, portfolio manager at Morgan Stanley Investment Management.
This “validates the stock’s upside potential” as the market will eagerly await those guidance, he said. told Bloomberg Television earlier this month.
A booming economy will continue to support stocks even in the absence of a rate cut, a Bank of America Corp. strategist said. Osung Kwon. The biggest danger to this premise will be that the economy slows and inflation remains high, he said.
“If inflation is persistent due to economic performance, that’s not necessarily bad for stocks,” Kwon said. “But there is stagflation.”