12/04/2023 Market Strategy
Reelin’ and a Rockin’
Stocks rallied for a fifth week as bond yields have fallen
Key Takeaways
- We remain positive on stocks and consider the broadening of the rally in equities across sectors and market capitalizations to be a constructive development.
- With 491 (99%) of the firms in the S&P 500 index having reported third-quarter earnings, results have been generally stronger than expected with earnings growth of 4.5% from a year earlier on revenue gains of 1.9%. Before the season began, bottoms-up estimates called for earnings to decline by 0.5% from a year earlier.
- Eight of the 11 sectors of the S&P 500 are showing positive earnings growth, with four (communication services, consumer discretionary, financials, and information technology) rising at double-digit rates.
- We’ve updated our maximum drawdowns table for the S&P 500 index to reflect the market’s recovery on Friday Dec. 1 from the 10.28% drawdown from the market’s prior peak for 2023 on July 31. At 4594.63 on Friday, the S&P 500 remains just 4.4% below its all-time high of 4796.22 recorded on Jan. 3, 2022.
Over the course of the last month bears have been capitulating as many institutional investors, private investors and retail investors add stocks in their portfolios as revenues and earnings for the S&P 500 beat expectations in Q3 earnings season and as bond yields moved noticeably lower. A spate of “FedSpeak” as Federal Reserve officials delivered remarks at different venues around the country has added to the sense that things are actually getting better with regards to inflation.
As of last Friday the so-called “turbo charged” rally had raised the Dow Jones Industrial Average, the S&P 500, the S&P 400 (mid-cap), the S&P 600 (small cap), the Russell 2000 (small cap) and the NASDAQ Composite (over 40% weighted in tech and tech related companies) respectively higher from the end of October through the first day of December by: 9.66%, 9.56%, 10.95%, 11.11%, 12.05% and 11.31%. This suggests a broadening of this year’s rally across market capitalizations as mid and small cap indices outperformed two of the three large cap indices in the latest period.
From the start of this year through December 1st the same indices were up as of last Friday’s close: 9.35%, 19.67%, 8.03% 4.06%, 5.76% and 36.67% decidedly showing a preference for the large cap indices with exposure to the big seven tech stocks that have driven the equity market most of this year on chip and artificial intelligence developments and prospects.
Over the course of the last week the financial media and other gauges of investor participation showed markedly improved sentiment towards stock ownership even in the more speculative areas such as meme stocks which have undergone a revival along with Bitcoin.
In our view the current year-end rally from the lows in October is constructive while nonetheless raises some concern that gains hastily achieved in just five weeks (in this fourth quarter of the year to new highs for the year) may have taken stocks near term to what will be seen as “overbought levels” requiring some pay back early next year.
We are not getting bearish but can remember a tendency for powerful rallies from year end to be met with some questioning on any catalyst for profit taking without FOMO in the first quarter or second quarter of the new year.
Contemporary markets (since the Great Financial Crisis and the Pandemic) have shown a tendency to get overbought and oversold pretty quickly particularly when sentiment has leaned heavily to either bearish or bullish persuasion.
We remain positive on stocks and consider the broadening of the rally in equities across the sectors of the S&P 500 as well as across major index market capitalizations to be a most constructive development in this current rally.
We are in the process of finalizing our price target and earnings projection for the S&P 500 in 2024 and expect to offer it by next week’s publication.
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