Published November 1, 2024
Delta Research posted a summary of bearish market thoughts recently we thought you might find interesting. The chart shown is messy as historical returns data can be all over the place. Nonetheless, the point is clear that “expensive” markets are less likely to deliver big returns. For our part, we prefer to remain focused on trying to profit in both good markets and weak ones, hoping that over time that delivers good results with lower risk. Here are Delta’s comments:
“Investment banks are beginning to publish their forward 12-month and beyond forecasts. The 20% plus appreciation of the S&P 500 year-to-date is a surprise to most market strategists. Although there are very few fundamental indications that the economy is headed for recession, many strategists are, at best, reluctant bulls.
Investment Bank Goldman Sachs published a forecast this week of 3% S&P 500 average annual returns (1% after inflation) for the next ten years. This subdued outlook is echoed by several major firms including JPMorgan.
Throughout market history, well-respected firms and people have made long-term bearish forecasts. In May 2009, bond king Bill Gross (PIMCO at the time) forecast risk assets would perform poorly in the U.S. He advised investors to focus on fixed income and international investments. He called his forecast the “New Normal.” Bill was entirely wrong. JPMorgan Chase has an S&P 500 year-end target for 2024 of 4200. With about two months left in the year and the S&P 500 at about 5800, we expect their forecast to be significantly off.
Why are stock market strategists worried? The number one reason is high valuation. The market seems to be “priced to perfection.” The cyclically adjusted P/E ratio (CAPE) is 38x, ranking at the 97th percentile since 1930. If inflation, growth, interest rates, election results, earnings, etc. move in an unexpected direction, they see downside risk.
The chart below shows 5-year annualized performance for the S&P 500 at various 12-month forward P/E levels. The current high valuation of the market does have a high historical correlation with lower returns over a five-year period.
Market concentration is at its highest level in 100 years. Because of the law of large numbers, it becomes increasingly difficult for very large companies to maintain high rates of growth. If revenue and earnings growth rates slow (partly as a requirement of heavy AI capital expenditures) for Amazon, Google, Meta, Nvidia, Tesla, Microsoft, Apple, etc., the overall S&P 500 index earnings growth slows.
In the past five weeks, the 10-year treasury has climbed from about 3.6% to 4.2%. If interest rates continue to rise, S&P 500 multiples may decline and economic growth may slow.
Bearish stock market arguments often seem “smarter” than bullish forecasts. As we close out 2024, here are some bullish thoughts to keep in mind:
- We are heading into the strongest seasonal time of year for the S&P 500
- The election will pass and along with it, election uncertainty and the potential for renewed investment activity,
- All year long, growth has surprised to the upside. The current price and strength of the stock market may be a reflection of better-than-expected growth this year so far and going forward,
- Many institutional investors are faced with buying pressure as they are materially underperforming their equity benchmarks,
- The corporate stock buyback window opened this week. U.S. corporations have the scope to add about $6 billion per day through the end of the year in stock buybacks,
- Fiscal year-end for mutual funds is October 31. Selling pressure from mutual funds falls significantly at the end of October,
- November is the third highest month, historically, for individual investors to add funds to their investment portfolios (January and April are the two highest months), and
- Bearish equity forecasts are often wrong.
As an investor, it is good not to become complacent. On the other hand, it is hard to be a successful investor if one is consistently pessimistic.”
Market Update
Investors focused this week on earnings from a host of Magnificent Seven companies alongside the monthly jobs report. Ahead of those reports, stocks rose +0.3% Monday while oil prices dropped -6% on relief that Israeli strikes against Iran avoided oil targets. Tech stocks rose for a second day Tuesday ahead of earnings reports with the Nasdaq adding +0.8% to close at a record high. The Nasdaq gave back most of that gain Wednesday as tech earnings came in mixed. Google parent Alphabet rose +3% while semiconductor market AMD disappointed investors falling -11% and pharmaceutical Lilly slid -6%. The initial 3rd quarter GDP report showed +2.8% growth. Thursday brought disappointing results from Microsoft and Facebook parent Meta with both stocks falling near -5%. That pulled the broad market down -1.9% for the day and left indexes lower for the month of October, albeit very modestly. The calendar turned to November Friday with a bit of a rebound. Mixed reports from Apple and Amazon held the rebound in the Nasdaq to +0.7% while a weak monthly jobs report did nothing to halt another tick upward in interest rates. Rates rose throughout October as economic growth looks solid and investors have been concerned about the potential for greater government deficits due to candidate fiscal promises.
Stocks logged another weekly dip this week as Mag 7 earnings reports largely underwhelmed. The S&P 500 dipped -1.38% while the Nasdaq 100 (QQQ) fell -1.59%. Small cap stocks closed flat with a +0.04% result.
Warm wishes and until next week.