Reasons to think Positive about Markets.

We believe there are at least three solid reasons that the gains we’ve seen in the 1st Quarter are sustainable, and that the equity markets still have additional upside potential. 

Steady, but not dazzling economic growth: There is an underlying economic momentum that seems to have put the “hard landing” scenario out of sight.  4th Quarter 2023 Gross Domestic Product (GDP) was just revised upward to +3.4% after a 3Q reading of +4.9%.  Both numbers represented positive surprises and were well ahead of the pace set in set in the first half of 2023.  While the economy is undoubtedly slowing after 11 interest rate hikes by the Fed, the central bank projects growth to be stronger in 2024 than they thought just a few months ago.  Steady, but not dazzling.  Due in large part to the continued strength of the consumer, instead of recession the economy is looking at our “soft landing” or even a “no landing” scenario. 

Strong corporate earnings.  Earnings for S&P 500 companies grew 9.8% year-over-year in the 4th Quarter according to data from Capital Group.  Although the 1Q ’24 may be a bit lower, consensus estimates for 2024 suggest sustained earnings rebound.  Capital Group points out how crucial corporate earnings are to equity prices.  “Stock will follow earnings, and earning will follow fundamentals,”

Artificial Intelligence.  The excitement and momentum surrounding AI will continue to drive big tech and should spread to small tech companies as they figure out how to monetize it.  But are tech stocks in a “bubble?”  While the sector is looking expensive on a historical basis it is nowhere near the dotcom bubble levels seen in 2000.

Right now, tech stocks are priced at about 27 times forward 12-month earnings; during thedotcom bubble it was closer 60x.  If AI continues to drive growth (and we believe it will), then the sector will be OK.  The potential for AI is real, so valuations look reasonable in our view.

Inflation.  This could turn out to be a catalyst for higher stock prices as we move further into 2024, but it is also the biggest question mark.  The last couple of months have seen the downtrend in inflation stop (pause?), although the 12-month trailing numbers don’t really show it yet.  One Fed governor recently, called the recent inflation figure’s “disappointing” and Chairman Jerome Powell has told us repeatedly that the path to 2% inflation will be a bumpy and that there is a risk of relapse.  Due to continued sturdy economic output and strong labor markets, which typically put pressure on prices, the Fed is taking this risk seriously. So far in April this has caused a market pulled back.