So far this year, U.S. stocks have risen dramatically amid uncertainty in the 2024 presidential election year, with the S&P 500 (SPX) and Dow Jones (DJI) both up 15% and the Nasdaq Composite (IXIC) up nearly 20%. However, investors are gradually beginning to question whether the gains will last, and they are paying attention to inflation and economic growth data to gauge the Federal Reserve's potential interest rate path and corporate earnings in the second half of the year.
According to Dow Jones Market Data, the S&P 500 is on track for its best first half of an election year since 1976, and the second-best performance in an election year ever. However, analysts at Ned Davis Research said the current rally "has led to overvalued, optimistic sentiment and an overbought market." Analysts also pointed out that a variety of factors make the U.S. stock market vulnerable to a correction in the second half of the year, including corporate earnings expectations, the possibility of a rate cut by the Federal Reserve and the uncertainty of the November U.S. presidential election, as well as the limited extent of the market rebound.
Sam Stovall, chief investment strategist at CFRA, said that while earnings expectations have been improving since the beginning of the year, with analysts now expecting earnings growth of 12% to 13% in 2024, valuations are rising faster, which could be a cause for concern. "We have to see if the increase in stock prices and (price-to-earnings ratios) is really because the market expects earnings to improve," he said. At present, there is still some time before the second-quarter earnings reports are released, and most of the data related to corporate revenue has been put aside.
William Northey, chief investment officer at U.S. Bank, said investors are more concerned about persistent inflation, which, along with growth data, will influence the timing and magnitude of the Fed's rate cuts this year. Although the CME FedWatch tool only expects the Fed to cut interest rates once this year, federal funds futures traders currently still expect two rate cuts starting in September.
This week, the U.S. will release the most important inflation-related data - the personal consumption expenditures price index (PCE) on Friday. James Ragan, D.A. Davidson Wealth Management Research Director, expects the May PCE to confirm a slowdown in inflation, as reflected in the CPI data released earlier this month. Stovall echoed this point, saying that he expects both the headline and core PCE figures to be lower than last month, which could be a good sign for the stock market.
Meanwhile, economic growth data remains another major focus as the market expects U.S. GDP growth to slow but remain optimistic, Ragan noted. “If we see weaker data, it’s not necessarily a bad thing for the market,” as it could spur the Federal Reserve to cut interest rates more quickly, he said.
“Bad news is good news—as long as it’s not too bad.”
For stocks to continue to rise, investors need to see gains expand from a price perspective and from an earnings contribution perspective, said U.S. Bank's Nosey, who observed that so far this year, the stock market's strength has been driven primarily by large technology companies such as Nvidia (NVDA.O).
“If the economy achieves a soft landing and remains positive, we would expect some cyclical sectors such as energy, financials, materials and industrials to participate more in the rally,” Ragan said. “We should watch these sectors very carefully; if they start to perform better, we could have a more sustainable rebound.”
The article is forwarded from: Jinshi Data