This Week’s “Noise”
The June Personal Consumption Expenditure Price index (PCE) report will be release on Friday giving us insight into the Federal Reserves preferred format for measuring inflation. (Bureau of Economic Analysis)
Several of Magnificent 7 release earnings report this week. Due to the size in the S&P as noted in our Quarterly Chart party these earning will have a larger impact on performance this week.
Existing Home sales fell 5.4% month over month with homes sitting for longer. Home inventory is at 4.1-months supply the highest since May of 2020 indicating this may be a shift to a buyers’ market. Homes/Rent Equivalent has been a large key sticking point on inflation. (National Association of Realtors)
Current Market Outlook (6 to 12 months)
Market
Lots of Political news in the past few weeks. Remember “Hating the government is not an investment philosophy”. The election is still months away and it’s anybody’s guess as to who will be sitting in the oval office a few months from now.
20% of S&P companies have reported Q2 earnings results (FactSet) with nearly 81% surprising on earnings per share (EPS) expectations.
It’s earning season and consensus estimates have earnings growing by 9% in Q2 on the S&P 500, the highest since 2021 (Goldman Sachs Global Investment Research). This holds with a soft landing and sets up well as the market looks forward.
Just 10 names comprise 38.1% of the S&P 500 market cap, the highest percentage in the last 30yrs (FactSet). They also represent only 24.5% of the earnings. They are trading at average of 34.2x Price-Earnings compared to a historic market average of 16.6x since 1996 (FactSet, Standard and Poor’s, July 5th, 2024). Our expectation is either earnings need to catch up to the market cap of some of these names, or the market cap will need to come down closer to the earnings. Remember, the companies that are currently the top 10 were not in the top 100 a decade ago. In our opinion, new companies tend to rise in order to take their place; David eventually beats Goliath.
Economic
A soft landing seems to be underway. The latest data and comments have indicated the Fed may have a path to cut rates. Although the odds of a cut in 2024 have greatly increased we don’t expect the Fed to march back down to near 0%. If that is the case the economic picture is much worse than anyone expects.
Long-Term View (4 to 7 years)
Long term we believe the US economy will continue to outperform other world economies. This is supported by a combination of re-shoring manufacturing, new investments resulting from the Inflation Reduction Act, US energy independence, and higher productivity due to the implementation of Artificial Intelligence (AI) software/systems.
We started 2023 predicting the broad stock market would return to the old highs in one to two years. It took only one year. We believe the US stock market should be 40% to 60% higher by the end of 2028. A S&P 500 index of 7,000 to 8,000 appears possible.
Bonds have re-emerged as an important part of asset allocation as yields have risen. We expect a diversified bond portfolio to produce returns 3% to 5% above inflation for the next 5 to 7 years.
"You get recessions, you have stock market declines. If you don't understand that's going to happen, then you're not ready, you won't do well in the markets."
— Peter Lynch
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The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete.
Any opinions are those of John O’Hare II and John O'Hare III and not necessarily those of Steward Partners. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions, or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected.
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Asset Allocation and diversification do not assure a profit or protect against loss in declining financial markets.
Bonds are subject to interest rate risk. When interest rates rise, bond prices fall; generally, the longer a bond's maturity, the more sensitive it is to this risk. Bonds may also be subject to call risk, which is the risk that the issuer will redeem the debt at its option, fully or partially, before the scheduled maturity date. The market value of debt instruments may fluctuate and proceeds from sales prior to maturity may be more or less than the amount originally invested or the maturity value due to changes in market conditions or changes in the credit quality of the issuer. Bonds are subject to the credit risk of the issuer. This is the risk that the issuer might be unable to make interest and/or principal payments on a timely basis. Bonds are also subject to reinvestment risk, which is the risk that principal and/or interest payments from a given investment may be reinvested at a lower interest rate.
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