Source: Zhitong Finance

Although the market's expectations for the Fed to cut interest rates continue to cool, according to some bullish Wall Street bulls on US stocks, even if the Fed does not cut interest rates this year, US stocks will achieve a bull market that has repeatedly reached new highs. According to these optimistic bullish players, mainly because the economic growth trend will support the US stock market, combined with the overall strong profit data of the seven major US tech giants, it is expected to boost the stock price trend.

Resilient US economic growth data may provide sufficient support for US stocks to resume the upward trend that has repeatedly reached new highs, even if there is a possibility that the market will completely abandon its bet on the Fed's interest rate cut this year.

Furthermore, the data shows that although expectations of the Federal Reserve's interest rate cut have cooled down sharply under inflationary pressure, the US stock benchmark index, the S&P 500 Index (S&P 500 Index), recorded the best weekly performance since November last week, driven by the strong performance of tech giants such as Google and Microsoft, last week, driving the index back to near the all-time high set in March.

But investors are faced with the question: is the weak pullback that occurred earlier this month only a temporary phenomenon, or are cooling expectations of the Federal Reserve's policy easing likely to lower the market again?

Some investors say that the answer is already hidden in the market script of the 90s of the last century. At that time, although interest rates had hovered around current levels for many years, the value of the US stock market more than tripled. At the time, strong economic growth data provided a platform for the stock market to fully show gains. Although the current global economic outlook is more uncertain, there is still enough momentum to push the stock market forward.

Fund manager Zehrid Osmani from investment agency Martin Currie said in an interview with the media: “You must evaluate why the number of interest rate cuts by the Federal Reserve this year may be drastically reduced compared to expectations.” “If this relates to a healthier economy than expected, then after the typical volatile knee-jerk response, this could support the stock market's rise.”

Prior to the sharp rebound of US stocks in the past week, the stock market was in a period of correction or consolidation throughout April. Previously, the market's initial expectations that the Federal Reserve's monetary policy might cut interest rates by more than 150 basis points drove record gains in US stocks and global stock markets at the end of 2023 and the beginning of this year.

Traders in the interest rate futures market originally anticipated that the Fed would cut interest rates at least 6 times by 25 basis points each time, but as US CPI and PCE data showed that the downward curve of US inflation was leveling off, and strong non-farm payrolls data suggested that inflation may even continue to rise, traders' general expectations have dropped to only one rate cut in the second half of the year. This has raised concerns that the Fed's long-term restrictive monetary policy will put tremendous pressure on the US economy and the potential of profitable enterprises, which in turn may trigger a recession or even “stagflation.”

Rising global geopolitical risks and uncertainty about the 2024 election results, including the US, have also led to a sharp rise in the volatility of the stock market, driving traders to hedge demand rather than bullish sentiment to prevent the market from plummeting more sharply.

Historical data shows that the pullback in US stocks before reaching new highs is a normal sign

Despite this, people's confidence in global economic growth has increased this year, mainly supported by the resilience of the US economy and recent signs of a rebound in China. Similarly, the International Monetary Fund (IMF) raised expectations for global economic expansion this month. According to an agency survey, economic growth in the Eurozone, another important economy, is expected to accelerate starting in 2025.

David Mazza, CEO of Roundhill Investments, said that although recent economic data reflects a slowdown in the US economy in the last quarter, these figures should be “reserved” because they partially mask the strong demand.

“Overall, I still believe we may not need to cut interest rates to restore more optimism, but I do think it will be more difficult to achieve interest rate cuts.” Mazza displayed.

Fears about the recession are easing — the number of news stories mentioning a “recession” has decreased this year

After the S&P 500 climbed to an all-time high in the first quarter, a short-term pullback was seen as a beneficial sign. Agency statistics show that between 1991 and 1998, the index fell 5% several times before a new sharp rebound, but there were no adjustments of 10% or more.

However, one obvious drawback of this comparison is that the current market capitalization concentration of the S&P 500 index is much higher than in the 90s of the last century. According to the data, the current top five stocks by market capitalization are$Microsoft (MSFT.US)$,$Apple (AAPL.US)$,$NVIDIA (NVDA.US)$,$Amazon (AMZN.US)$As well as Facebook's parent company$Meta Platforms (META.US)$They all come from the technology industry. These high-weight stocks account for nearly a quarter of the market value of the S&P 500 index, which makes the index vulnerable to sharp fluctuations in these tech giants, but in recent quarters, the S&P 500 index has repeatedly reached new highs driven by the strong performance of these tech giants.

A Bank of America analysis shows that since 1929, the S&P 500 index has experienced an average of 5% or more correction three times a year. Although US stocks have basically risen in recent months, this decline is not uncommon.

History shows that US stocks are often likely to fall sharply after a strong start to the year, after which the stock market usually adjusts itself and continues to rise higher. According to a study by Truist Advisor Services, a trust advisory service company, every time the S&P 500 index rose 10% or more in the first quarter, there was an average biggest decline of 11%. However, out of 11 such events since 1950, the index finally closed higher in 10 of the 11 such events.

However, there are other important factors that benefit the US stock market.

Analysts were surprised by an analysis by Bank of Montreal Capital Markets (BMO Capital Markets) that the return on the S&P 500 index is closely related to higher yields. The analysis shows that since 1990, when the yield on 10-year US Treasury bonds is above 6%, the average annualized increase of the index is close to 15%, while when the yield falls below 4%, the annualized return of the index is about 7.7%.

BMO's chief investment strategist Brian Belski wrote in a note to clients: “This is logical for us because lower interest rates may reflect weak US economic growth, and vice versa.”

The US stock market performed better under the interest rate hike mechanism — according to a BMO analysis report, rising interest rates indicate a stronger economy

Statistics show that in the past week, the 10-year US Treasury yield hit a yearly high of 4.74% due to the overall cooling of US policy easing prospects.

Led by the strong performance of tech giants, strong corporate profit data is expected to drive the bullish trend of US stocks

Preliminary results for the current earnings season show that even against the backdrop of high US benchmark interest rates, the performance of about 81% of S&P 500 companies exceeded analysts' general expectations. According to data compiled by Bloomberg Intelligence, the overall earnings per share of the S&P 500 index constituent companies in the first quarter are expected to increase 4.7% year over year, while the general forecast before the earnings season was 3.8%.

Judging from the DCF model, although the 10-year US Treasury yield, which is equivalent to the r indicator on the denominator side of the DCF valuation model, remained high during the year after the Fed's interest rate cut expectations cooled down, if cash flow expectations on the molecular side continued to recover upward, it could greatly increase the pricing range of risky assets such as stocks. However, to a large extent, cash flow expectations on the molecular side are based on the performance of the earnings season, so the increase in corporate profits is critical to the pricing trend of risky assets such as stocks. According to the US corporate profit improvement data released by Citigroup, analysts have recently continuously revised their profit expectations for US companies.

According to data compiled by Bloomberg Intelligence, analysts generally expect S&P 500's overall earnings per share to increase by 8% in 2024 and is expected to increase sharply by 14% in 2025, mainly driven by the strong performance of the “Magnificent 7” (Magnificent 7) of US stocks.

Magnificent 7 includes Apple, Microsoft, Google, Tesla, Nvidia, Amazon, and Meta Platforms. Global investors have continued to flock to the top seven tech giants since 2023 and the first quarter of 2024. The main reason is that they are betting that due to their huge market size and financial strength, they are in the best position to use artificial intelligence technology to expand revenue.

Andrew Slimmon, portfolio manager from Morgan Stanley's investment management department, said that even if the Federal Reserve cuts interest rates to zero in 2024, the profit expectations of US companies may increase next year.

In an interview earlier this month, he said that given that the market will be relatively optimistic about the performance of US tech giants, this “confirms the potential upside of the stock market.”

Michael Wilson, a well-known Wall Street bear and chief stock strategist from Morgan Stanley, recently released a report saying that it is expected that the overall earnings per share growth trend of US companies — that is, the overall earnings per share of companies in the S&P 500 index — will improve. The well-known Wall Street strategist said that the pressure to push the US stock market to rise further will be corporate profitability rather than interest rate expectations.

The stock strategy team led by Michael Wilson of Morgan Stanley said that as the US economy strengthens, the profit growth rate of US companies is expected to improve markedly in 2024 and 2025. This is also a “big short” Michael Wilson rarely optimistic about earnings per share since 2023. Regarding the latest outlook on earnings expectations for US stocks, Wilson emphasized that with the support of new order data, the recovery data from the US business activity survey “confirms the continued growth trend of future profits.”

In terms of Wall Street analysts' general expectations, analysts expect US companies to achieve a stronger year-on-year earnings per share growth rate in 2024 — after a year-on-year growth rate of less than 1% last year, it is expected to increase by about 8% this year.

Bank of America Corp. strategist Ohsung Kwon said that even if the Federal Reserve does not cut interest rates, the prosperous US 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 relatively high.” If inflation remains sticky due to economic momentum, it is not necessarily bad for the stock market,” Kwon said. “But stagflation is it.”

The strategy team at Wall Street firm Goldman Sachs predicts that the performance of the “Seven Major US Tech Giants”, including Apple, Microsoft, Google, Tesla, Nvidia, Amazon, and Meta Platforms, is expected to continue to grow strongly in 2024, which in turn will drive US stocks to rise.

The Goldman Sachs Strategy Team said that the seven tech giants accounted for 11% of the total sales of the S&P 500 Index in 2023 and 18% of total profit. At the same time, the agency expects the seven tech giants to increase their earnings per share by at least 20% in 2024. Looking at the compound annual growth rate (CAGR), the overall sales CAGR of the “Big Seven Tech Giants” from 2013 to 2019 was as high as 15%, while the compound annual growth rate of other stocks was 2%. This gap narrowed for a while from 2021 to 2022. However, Goldman Sachs strategists expect that from 2023 to 2025, the overall sales of the “Big Seven Tech Giants” will reach a compound annual growth rate of 11%, while the compound annual growth rate of the other components of the S&P 500 index is only 3%.

Bank of America strategist Michael Hartnett, who has the title of “Wall Street's Most Promising Strategist,” recently pointed out that until real interest rates rise and concerns about the economic downturn, the US stock market may continue to rely on a few large stocks to guide the direction of the market. Hartnett pointed out that US tech giants are expected to continue to lead US stocks to new highs. In other words, US stocks will continue to rely on the seven tech giants, such as high-weight stocks, to determine the general market direction, until the actual yield on 10-year treasury bonds rises to about 3%, or until higher yields combined with larger credit spreads pose a threat to the economic recession.

Wedbush, a well-known investment agency on Wall Street, said that the profit environment for US technology companies still seems to be strong, especially considering the fanaticism of companies and consumers about artificial intelligence, which has driven a sharp upward trend in technology stocks over the past year. Wedbush said that a strong US earnings season may be the main positive catalyst for technology stocks in the near future, and the agency predicts that by the end of 2024, the Nasdaq 100 index, which covers many US technology stocks, is expected to continue to reach new highs.

Regarding expectations for the US stock benchmark index, the S&P 500 index, Tom Lee, a well-known Wall Street leader and co-founder and head of research at the US investment agency Fundstrat Global Advisors, recently said that the sell-off in US stocks that began at the beginning of the month and has continued for several weeks is coming to an end.

Tom Lee, who can be called the “magic operator of Wall Street,” said that the decline in US stocks was mainly driven by investors' double safe-haven response to concerns about recent rising inflation and heightened geopolitical risks in the Middle East, but Tom Lee expects these risks to eventually dissipate, paving the way for US stocks to resume their upward trend and reach new highs before the end of the year. Tom Lee expects the S&P 500 to reach 5,700 points this year, ranking among Wall Street's most optimistic S&P 500 expectations, higher than Bernstein, Wells Fargo, and Oppenheimer's 5,500 point expectations.

According to information, Lee was one of the few bullish forces on Wall Street that successfully predicted the S&P 500 index in the second half of the year last year, and he accurately predicted the upward trend of US stocks in 2023 at the end of 2022. Lee predicted at the end of 2022 that the S&P 500 index would soar by more than 20% to 4,750 points in 2023. In the end, the index unexpectedly soared in 2023, and the final point was only more than 30 points away from Lee's target point.