February 23, 2024
S&P 500 continues to rise defying valuation warnings: market downturn


(Bloomberg) — Stocks climbed anew on hopes of further data underscoring deflation progress — paving the way for the Federal Reserve to start cutting interest rates this year.

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Less than 24 hours before the consumer price index, a report showed medium-term inflation expectations fell to the lowest since at least 2013, boosting trader sentiment. The S&P 500 surged past 5,000, dismissing concerns about an overstretched market, with Nvidia Corp. Amazon.com Inc. It became the fourth most valuable US company by market capitalization.

“This race to $5,000 is supported by fundamentals, with the likelihood of a soft landing rising and an earnings season well above expectations,” said Jeffrey Buchbinder of LPL Financial. “It seems high for the market to trade at 20 times earnings, but it is reasonable if the U.S. economy avoids a recession and has double-digit earnings growth this year – which is not out of the question.”

After struggling in the first hour of New York trading, the S&P 500 rose above 5,040. Chip designer Arm Holdings Plc surged as much as 42% in the wake of last week’s blockbuster earnings report that showed artificial intelligence spending was boosting sales. Treasury 10-year yields were little changed at 4.18%. Bitcoin briefly rose above $50,000 for the first time since December 2021.

According to Tom Essay at Sevens Report, last week’s news and data reinforced four drivers of this bull market: a Fed rate cut by May, solid economic growth, persistent deflation and strong earnings.

“It’s important to acknowledge that this rally is being driven by real good news and bullish expectations reinforced by real data,” Essay said. “At the same time, the risks that worried investors in October (and even throughout 2023) have not been eliminated – they have not yet emerged.”

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The annual CPI is projected to fall to 2.9% in January from 3.4% the previous month, according to a consensus estimate from economists surveyed by Bloomberg. This would be the first reading below 3% since March 2021 – supporting a deflationary trend that will determine the scope and timing of rate cuts.

Fed Governor Michelle Bowman reiterated that the central bank’s benchmark lending rate is well-positioned to keep pressure on inflation low, and she does not see a need to ease policy any time soon. Thomas Barkin, president of the Fed Bank of Richmond, said that we are getting closer to the inflation target, but we are not there yet.

Traders are starting to price in that the Fed will make only four — or at most five — quarter-point rate cuts in 2024, slightly more than the three set by policymakers. That’s a sharp change from late last year, when futures traders were betting on seven such moves.

“It’s important not to lose sight of the bigger picture, which is that persistent deflation should the central bank start tapering this year,” said Mark Haefele of UBS Global Wealth Management. “This is a significant change in the investment landscape, so we think it is less important whether the Fed will cut three, four or five times this year.”

Even if the Fed doesn’t cut interest rates, the S&P 500 could extend its climb this year, according to Bank of America Corp’s Savita Subramaniam.

“Remember that our constructive view on stocks is not based on what the Fed will do, but on what the Fed has already done,” he said, referring to the central bank’s ability to tame inflation without recession.

“Most people will be focused on this week’s inflation data, but there’s also a potential tug-of-war between how long the current market rally can last versus talk of the S&P 500 reaching 5,000,” said Chris Larkin at E*Trade. From Morgan Stanley. “While it is true that the S&P has often pushed higher after crossing ’round-number’ thresholds like this, it has not always done so after the type of rally that has unfolded since late October.”

Since 1968, whenever the S&P 500 rose at least 20% in the 70-trading-day period, which it did between Oct. 27 and last Thursday, more often than not it was lower two weeks later, Larkin noted.

Because of the old adage that “big round numbers work like a rusty door and require many attempts before it finally opens,” investors now wonder whether the market is suffering from exhaustion after reaching such a major peak. Now is the time to take some profits before a potential decline, according to Sam Stovall at CFRA.

If history is any guide, he said, short-term gains have indeed occurred, but their duration has been quite short. Looking at the cumulative returns of the S&P 500 over 3-, 6-, and 12 months after crossing the 100, 500, 1,000, 2,000, 3,000, and 4,000 levels, the S&P 500 recorded an average price gain of 4.7%, 9.8 . %, and 12.3%, and the price increased during 83% of all periodic observations, he said.

Craig W. Johnson at Piper Sandler said, “The current state of the equity markets can be summarized by the hit from 1981’s 38 Special: “Hold loosely, but don’t let go.” “To be clear, we are talking about the stock market. But we are not bearish. However, as the ‘bad breadth’ persists, the market is set for a healthy correction, which is likely to be in the range of 5% to 10%.

Nicholas Colas at Datatrack Research said the S&P 500 is currently trading at about 20 times forward earnings — a level reached in only two other periods in the last 25 years: the dot-com bubble and the post-pandemic bull. market.

“Valuations reach these levels when investors have more confidence in three factors: monetary/fiscal policy, the US/global banking system and strong corporate earnings,” Colas said. “Even with a bear market heading into 2022, investors feel the future is highly predictable. “It would probably take an external shock to change their minds.”

For Rob Swanke at Commonwealth Financial Network, some caution is warranted at current valuation levels.

“I wouldn’t say we’re in bubble territory, but the market is now pricing near perfection and companies will need to continue to hit higher earnings targets in 2024, something they didn’t have to do in 2023,” he said. ” ,

Corporate Highlights:

  • The Federal Reserve slapped Citigroup Inc with multiple demands to change the way it measures the risk of its trading partners, the latest blow to Chief Executive Jane Fraser’s turnaround effort, Reuters reports.

  • Diamondback Energy Inc. agreed to buy fellow Texas oil and gas producer Endeavor Energy Resources LP in a $26 billion cash-and-stock deal to create the largest operator focused on the prolific Permian Basin.

  • Gilead Sciences Inc. Cymabe Therapeutics Inc., developer of an experimental drug for liver disease. agreed to buy for $4.3 billion in equity value.

  • Hewlett Packard Enterprise Co. is seeking $4 billion from the former owners of Autonomy Corp. after a London judge concluded that they fraudulently inflated the company’s value ahead of its sale.

Major events of this week:

  • Germany ZEW surveys expectations, Tuesday

  • US CPI, Tuesday

  • Eurozone industrial production, gross domestic product, Wednesday

  • BoE Governor Andrew Bailey testified before the House of Lords economic affairs panel on Wednesday

  • Chicago Fed President Austin Goolsbee speaks on Wednesday

  • Michael Barr, Fed vice chair for supervision, speaks on Wednesday

  • Japan GDP, industrial production, Thursday

  • US Empire Manufacturing, Initial Jobless Claims, Industrial Production, Retail Sales, Business Inventories, Thursday

  • ECB President Christine Lagarde speaks, Thursday

  • Atlanta Fed President Raphael Bostic speaks on Thursday

  • Fed Governor Christopher Waller speaks Thursday

  • ECB Chief Economist Philip Lane speaks, Thursday

  • US housing starts, PPI, University of Michigan consumer sentiment, Friday

  • San Francisco Fed President Mary Daley speaks, Friday

  • Fed Vice Chairman for Supervision Michael Barr speaks on Friday

  • ECB Executive Board member Isabelle Schnabel speaks on Friday

Some key movements in the markets:

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  • The S&P 500 rose 0.3% as of 1:28 p.m. New York time

  • Nasdaq 100 rose 0.1%

  • Dow Jones Industrial Average rose 0.6%

  • MSCI World Index rose 0.3%

currencies

  • The Bloomberg Dollar Spot Index was little changed

  • The euro was little changed at $1.0782

  • The British pound was little changed at $1.2633.

  • Japanese yen little changed at 149.34 per dollar

cryptocurrency

  • Bitcoin rises 3.7% to $49,909.51

  • Ether rose 4.8% to $2,625.61

bond

  • The yield on 10-year Treasuries was little changed at 4.17%

  • Germany’s 10-year yield fell two basis points to 2.36%

  • UK 10-year yield fell three basis points to 4.06%

Goods

  • West Texas Intermediate crude was little changed

  • Spot gold fell 0.2% to $ 2,019.51 an ounce

This story was generated with the assistance of Bloomberg Automation.

–With assistance from Alexandra Semenova, Michael McKenzie, Liz Capo McCormick, Ye Xie and Denitsa Tsekova.

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Source: finance.yahoo.com

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