market snapshot
A rally in U.S. stock and bond markets last week defied bears and raised hopes of more gains through year-end and 2024, as Wall Street embraced the idea that the economy will make a “soft landing.” A series of interest rate increases by the Federal Reserve.
But market skeptics are cautioning investors that a “soft-landing” scenario is still at risk as corporate earnings as well as consumer spending and job growth slow.
“The equity market is misguided,” said Josh Schachter, senior portfolio manager at Easterly Investment Partners, in a phone interview with MarketWatch. “Markets are behaving in an almost bipolar fashion – some asset classes like bonds, oil and the dollar are being priced bearish, while other assets like equities and bitcoin are priced at risk.”
US stocks extended November’s gains last week, with the S&P 500 index finishing at a new 2023 high on Friday and the Dow Jones Industrial Average entering its fifth week in the green. The surge in stocks was partly due to bond investors believing that the Fed has raised interest rates and is likely to start cutting them by the first quarter of 2024.
Meanwhile, the narrative that a flexible labor market and steadier-than-expected economic growth should keep recessions away has taken hold, reinforcing a “Goldilocks” scenario for financial markets.
However, signs are emerging that consumer spending, which accounts for about 70% of US economic output and has boosted the economy this year, has likely run its course as the post-pandemic recovery continues. Credit card and car loan default rates are rising, student loan payments have resumed, consumer spending is cooling, and warnings are coming from top retailers.
Joseph Quinlan, head of market strategy and CIO at Bank of America Private Bank Merrill, said the consumer sector in the U.S. is seeing “softness” but not a huge one, referring to it as “a canary in the coal mine.” Did, he told MarketWatch via phone on Thursday.
The slowdown in consumer spending is welcome news for Fed officials, who have raised interest rates 11 times through March 2022 to get inflation back to their preferred target of 2%. However, some analysts are concerned that higher interest rates and a decline in pandemic savings could ultimately weigh on consumers even more in 2024, potentially signaling another long-expected recession in the US economy.
Jason Heller, senior executive vice president at Coastal Wealth, said, “One of the things I’m most concerned about is the ability of consumers to continue to fuel the economy — you have a number of headwinds that have really yet to fully materialize.” Has not ended since.” , , “Will consumers continue to behave as they have over the past 36 months? I think you will eventually see a slowdown in consumer spending which will mandate a slowdown in the labor market.
Lauren Goodwin, economist and portfolio strategist at New York Life Investments, acknowledged that a modest slowdown in inflation and employment growth means stocks could sustain a “Fed relief rally,” but her concern is that it may be too late. The cycle is no different from the crisis. The past, which is the “Goldilocks” moment, before inflation is slowing – economic growth and employment are slowing – becomes evident in the data.
That’s why the November employment report, to be released next Friday at 8:30 a.m. Eastern by the Bureau of Labor Statistics, will be worth a watch for investors. The US is expected to add 172,500 jobs in November, compared with an increase of 150,000 in the previous month, according to a survey of economists conducted by Dow Jones. The percentage of unemployed Americans looking for work is projected to remain the same at 3.9%, the highest level since the beginning of 2022.
In fact, the day of nonfarm payrolls report publication has been the most volatile for stocks in 2023 compared to the release of monthly consumer-price index readings, which have generated some of the largest daily fluctuations for the S&P 500 and other major indices. Gave birth to. , In 2022.
The S&P 500 saw an absolute average percentage change of 1.12% on employment situation release dates this year, while CPI days saw an average percentage increase of 0.64%, according to data compiled by Dow Jones Market Data.
That said, analysts are skeptical about whether employment data is able to tell “a fundamentally different story,” but suggest the labor market will remain relatively tight into 2024, Quinlan & Lauren at Merrill and Bank of America Private Bank. Sanfilippo said in a phone interview. ,
Too much optimism in 2024 earnings growth
Corporate America and their stocks are telling investors a different story about next year.
With average S&P 500 earnings growth projected next year at 11.7%, the U.S. stock market is nowhere near recession concerns, Heller said. “We have priced [the stock] for quite significant upside in 2024.”
Merrill and Bank of America Private Bank strategists are expecting “mid-single digit” earnings growth for the S&P 500 in 2024 as earnings declines ease and the economy returns to the 2%-level of real growth. Higher rates then limit consumer spending and corporate profits, causing a hot economy to cool.
Indeed, Wall Street analysts overestimate earnings per share (EPS) for the S&P 500, said John Butters, senior earnings analyst at FactSet.
The current bottom-up EPS estimate for the S&P 500 in 2024 is $246.30. If true, it would be the highest EPS number reported by a large-cap index since FactSet began tracking this metric in 1996.
However, over the past 25 years, the average difference between EPS estimates and the actual EPS number at the beginning of the year has been 6.9%, meaning analysts on average have underestimated a year’s worth of earnings, Butters said Friday.