Source: Finance Association
Author: Huang Junzhi
① Wall Street now believes that whether US stocks rise or not has much to do with the Federal Reserve's interest rate cut;
② Last week, the S&P 500 index recorded its best weekly performance since November last year, driving the index back to its record level in March;
③ They believe that the key now is a strong economy.
Most Wall Street players believe that strong economic growth may provide sufficient support for the US stock market to resume record gains, even if bets on the Fed cutting interest rates this year are completely abandoned.
Last week, the S&P 500 index recorded its best weekly performance since November last year, pushing the index back to its record level in March. As a result, investors are faced with the question: is the weakness seen earlier this month only a temporary phenomenon, or will delayed policy relaxation once again lower the market?
Some investors say that the answer lies in the market script of the 90s of the last century. At that time, although interest rates hovered near high levels for many years, the value of the stock market more than doubled. At the time, strong economic growth provided room for the stock market to rise. Although the current global outlook is more uncertain, there is still enough momentum to push the stock market forward.
Martin Currie fund manager Zehrid Osmani said in an interview, “You have to evaluate why the number of interest rate cuts may decrease this year. If this relates to a healthier economy than expected, then after the typical volatile 'knee-jerk response', this could support the stock market's rebound.”
US stocks continued to pull back throughout April before rising in the past week. At the beginning of January this year, traders also anticipated that the Federal Reserve would cut interest rates at least 6 times this year. However, as US inflation remains high, the CME Federal Reserve's observation tool shows that now the market generally expects only one rate cut this year, the earliest in September.
Bank of America (Bank of America) strategist Ohsung Kwon said that even without interest rate cuts, the prosperous economy will continue to support the stock market. He said that the biggest risk facing this premise is that if the economy slows down, inflation remains high.
“If inflation remains sticky due to economic momentum, it is not necessarily bad for the stock market,” he said. “Stagflation is dangerous.”
Economic data falls short of expectations and is not scary
Roundhill Investments CEO David Mazza said that although recent economic data reflected a sharp slowdown in the US economy in the previous quarter, these figures should be “reserved” because they overshadow previously strong demand.
On Thursday, the preliminary report released by the Bureau of Economic Analysis showed that the US real GDP growth rate for the first quarter fell far short of expectations: 1.6% annualized month-on-month growth, the lowest since Q1 2023, 0.9 percentage points lower than market expectations of 2.5%. This indicator for the fourth quarter of 2023 was 3.4%. The report triggered a short-term dive in US stocks.
According to information, the US Bureau of Economic Analysis usually estimates quarterly economic data three times based on continuous improvement information to obtain the initial value, revised value, and final value separately. This is the first report, that is, the initial GDP value report for the first quarter.
“Overall, I still believe we don't need to cut interest rates to restore more optimism, but I do think cutting interest rates will be harder,” Mazza said.
Learn from history
Analysts believe that after the S&P 500 rose to an all-time high in the first quarter, some short-term pullbacks were seen as beneficial. According to data collected by the media, between 1991 and 1998, the index fell 5% several times before a new rebound, but there were no adjustments of 10% or more.
They pointed out that one drawback of this comparison is that the index is now much more concentrated than in the 90s of the last century.
Currently, the top five stocks are Microsoft, Apple, Nvidia, Amazon, and Meta. They all come from the tech industry and account for nearly a quarter of the market capitalization, which makes the index vulnerable to more intense fluctuations.
Good financial reports
Preliminary results for the current earnings season show that even against the backdrop of rising interest rates, about 81% of US companies have surpassed expectations. According to data compiled by the media, earnings for the first quarter are expected to increase 4.7% year over year, compared to the pre-quarter forecast of 3.8%.
According to data compiled by a business think tank, analysts expect S&P 500's profit to grow 8% in 2024 and 14% in 2025 after sluggish growth in the past year.
Andrew Slimmon, portfolio manager at Morgan Stanley Investment Management, said that if interest rates were cut to zero in 2024, the profit forecast for next year could be higher.
“Given that the market will look forward to these predictions, it indicates that there is room for an upward trend in the stock market.” he said.
Editor/Jeffy