With the market punching out all-time highs consistently, our base case has been a rather checked first half of the year as bond speculators obsess over the timing and number of rate cuts. When clarity from the Fed arrives in the second half of the year, expect more consistent progress of the new upside objective, which targets now suggest is 6000 on the S&P 500.
As one can see below, the index has registered multiple positive breakouts just this year: three consecutive breakouts with the most recent occurring at 4950. Readers will recall that rising columns are X’s and numbers represent months (A-C are Oct-Dec). That said, the S&P on Friday reached the top of its expected short-term range so a pullback like yesterday’s is not unexpected.
Until the Fed actually moves, macro considerations will hold sway, with the rate cut question most important. This Fed obsession is what causes the extreme volatility in our view. Consider this post from Dr. John Rutledge, veteran strategist and current Chief Investment Strategist at Safanad:
“Some factoids: the average stock trader is 30 years old; the average Wall Street Journal subscriber is 47; the average S&P 500 company is less than 20 years old. (Here’s a sobering thought. That means the roughly 40-year duration of the average cash flow stream priced into the index is about double the average age (20) of the companies that are supposed to produce that cash flow run by managers who have been there even less than that).”
This obsession with the Macro background and interesting-sounding, data-driven vignettes like the ones above take investor eyes off the real drivers of stock prices: earnings and free cash flows. Thursday’s action of Meta and Amazon is telling. Add in the sandbagging effect as outlined by Lance Roberts…
When you lower #estimates enough heading into #earnings it is not surprising to get this stat: “54% of companies have beat earnings estimates by >1SD. This is significantly higher than the avg of 48%. Only 10% have missed estimates by >1SD (less than the avg of 13%).”
Because our favored short-term indicators are extended and the major indices have reached short-term targets, we expect increased volatility and do not rule out a significant drawdown as the market backs and fills from its October 2023 low (another significant Oct bottom!).
Historically, February is a month that has had its share on consolidations. Once any short-term turbulence has passed and recent gains have been consolidated, we expect the market will start to run once again, this time in anticipation of a solid Q1 earnings reporting season.
The bulls may need a well-deserved breather, but they remain in charge.
