This Week’s “Noise”
Wednesday’s holiday means a short week for the markets. No major announcements planned this week.
Current Market Outlook (6 to 12 months)
Market
We are near half time for ’24; so far the market has risen from overly negative sentiment in ’23 and good earning numbers in the first 2 quarters. Based on expectations if the Price to Earnings ratio (P/E) holds steady the market has already priced in growth at a slower pace than last year, but still ultimately higher earnings per share. We may have gotten much of the upward move for the year in already with the next few months either churning sideways or a series of pullbacks that then return similar levels. The Nasdaq composite index is market weighted (meaning larger companies have a greater impact in its move). Today just 10 of the 2,500 listed comprise 50% of its market cap. Just 1 single stock’s market cap move this year has accounted for 51% of the Nasdaq YTD 14.11% move (6/8/24). In 2000 the S&P had over concentration in top names and at its peak the top 10 names were around 26% of the index market cap; as of the end of May it’s 35.4%! To contrast in 2000 those top names represented 16% of the earning and traded at a 43x Forward Price/earnings (P/E) multiple. Today those top 10 are better contributors with 27% of the earning and trading at an average of 28.1x forward P/E. This kind of concentration ends one of two ways; the leaders come back down or the laggards surge to catch up as the leaders stagnate. (FactSet)
Economic
When the U.S. grew last year, it did so at a breakneck speed; our earlier predictions about slower than trend growth and a return to low single digit U.S. GDP growth seem to be in line with data YTD.
The POTUS election in Nov is still anyone’s guess, commentary and handwringing will likely begin to increase over the summer. It’s always difficult, but as we discussed in our Quarterly Chart Party people’s view of the economy and the market change when “their team” is holding office. That is however only a perception. The reality is any POTUS may try to have policies that drive certain economic activity, but it’s the individuals in this world engaging in commerce with zero thought of their elected officials that move markets.
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 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.
"The desire to perform all the time is usually a barrier to performing over time."
-Robert Olstein
See important disclosures below:
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 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.
Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary. Past performance does not guarantee future results. Future investment performance cannot be guaranteed, investment yields will fluctuate with market conditions.
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.
The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market.
The NASDAQ composite is an unmanaged index of securities traded on the NASDAQ system.
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