10/21/2024 Market Strategy
- October 21, 2024
Where to from Here?
Economic Data and Earnings Results Are Likely to Drive Markets Going Forward
Key Takeaways
- With just 72 or 14% of the firms in the S&P 500 index having reported, earnings thus far are off to a good start. Profits in Q3 overall were up 6.7% from a year earlier on 4.5% revenue growth.
- This week brings another 113 companies reporting results, including key names in the industrials, technology, and consumer sectors.
- We discuss the near-term outlook for the markets with results likely to be influenced by key economic and earnings results due in the coming weeks.
- Last week’s retail sales data for September surprised to the upside and rounded out a strong quarter of retail activity that suggests that personal consumption drove a strong GDP result in Q3 when economic growth is reported on October 30.
A question we aren’t often asked by investors is, “what’s the market telling us?”
From our perch on the market radar screen it looks to us that it’s telegraphing better things ahead for stocks and normalization for the bond market with interest rates to move somewhat lower as the Federal Reserve Board feels more comfortable in easing interest rates lower while keeping its eyes on inflation to avoid a flash back of sticky inflation and to keep unemployment at a rate of 4% or lower.
So far the Fed’s tightening of monetary policy has seen the Fed effectively bring down inflation from around 9% in March of 2022 to around 2.5%–3% (depending on which inflation gauge one favors to reference) without pushing the US economy into a recession.
After delivering 11 rate hikes and nine pauses from March of 2022, the Fed cut its benchmark rate by 0.50 bps (one half of one percent) on September 18 taking its Fed Funds rate from a range of 5.25%–5.50% to 4.75%–5%.
History in our experience has shown that monetary policy, economic conditions, corporate and revenue and earnings growth generally carry more weight in terms of the direction markets might take in the period that follows most national elections…
While the Fed’s 2% inflation target remains elusive that didn’t keep the Fed from beginning to cut its benchmark rate by 50 bps (one half of one percent) on September 18.
While investor opinion differs from thinking the Fed cut of 50 bps was too much, to just enough and to not enough, the stock market hasn’t appeared to protest the rate cut in our view too much judging by the performance of a number of the stock market’s widely followed indices from September 18 through last Friday October 18.
A glance at our Bloomberg screen showed that as of the markets’ close last Friday the Dow Jones Industrial Average, the S&P 500, the NASDAQ Composite (some 40% tech and tech related), the S&P 400 (mid-caps), the S&P 600 (small caps), and the Russell 2000 had moved respectively higher by: 4.27%, 4.39%, 5.21%, 4.11%, 2.40% and 3.16% in the period.
Large cap stocks and mid-caps led the rally with small cap stocks lagging in price performance for the period.
The S&P 500 sectors in the latest month through last Friday saw nine of its sectors posting price gains. The six of the nine sectors that outperformed the underlying benchmark and the other five sectors in the broad market index were: information technology, industrials, financials, materials, utilities, and communications services. The six outperforming sectors advanced respectively in the period: 7.24%, 5.83%, 5.72%, 5.2%, 5.07% and 4.55%.
The three underperforming sectors that posted positive returns were: energy, consumer discretionary, and real estate up respectively: 3.68%, 3.06%, and 0.19% in the period.
The two underperforming sectors in the period were consumer staples and health care with respective modest losses of 0.71% and 1.17%.
In our view, the market has showed a broadening of a rally across sectors, market capitalizations and style. Large caps, Cyclicals, and growth appeared to garner more investor favor in the period than defensive sectors and small caps.
For all the drama last week over mixed results among the semi-conductors we persist in seeing positive developments providing offsets to negatives on a number of fronts that are key to equities including those pertaining to the economy and earnings and revenue growth.
We expect investors to be focused on key economic data scheduled for release this week and S&P 500 Q3 earnings results over the full 5 day week with some 113 companies reporting revenue and earnings results. Guidance from management as to what might lie ahead for their companies in the weeks and months ahead should carry significant weight with market participants this week.
While the election (now around 15 days away) could provide some domestic policy risk near term for the markets it is our view that it will likely have less effect in the near term than some may think. With the expected results of the election as close as indicated by the pollsters and political strategists we continue to expect the market first to give a sigh of relief once the results of the Presidential, the Senate, and House elections are known and then begin to formulate views as to the what direction the market will take.
History in our experience has shown that monetary policy, economic conditions, corporate and revenue and earnings growth generally carry more weight in terms of the direction markets might take in the period that follows most national elections rather than the political arguments in the heat of electioneering before the election.
We believe it’s important for investors to keep expectations right-sized in the current environment of economic transitioning, a normalization process for rates and a watershed-like period of innovation in the current economic cycle and the secular (longer term) period ahead.
Notwithstanding election year nervousness on policies intimated by either Presidential candidate as well as heightened geopolitical risk in the Middle East, the S&P 500’s and the Dow Jones Industrial’s latest respective record high prices of this year reached last Friday with a closing price of 5864.67 for the S&P 500 and 43,275.91 for the Dow Jones Industrial Average suggests to us a market bolstered by economic resilience and healthy earnings growth has further room to move higher.
John Stoltzfus
Title:Chief Investment Strategist, Oppenheimer Asset Management Inc.
John is one of the most popular faces around Oppenheimer: our clients have come to rely on his market recaps for timely analysis and a confident viewpoint on the road forward. He frequently lends his expertise to CNBC, Bloomberg, Fox Business, and other notable networks.
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