Why The Stellar Returns Of 2024 Can Continue

Despite the endless wall of worry, the market/S&P 500 (SP500, SPX) continues rocketing to new highs. The SPX has gained over 1,000 points (25%) since last October’s correction bottom.

The market has been on fire, skyrocketing to new all-time highs almost daily. AI enthusiasm, expectations of a more accessible monetary environment, robust earnings, a resilient economy, and other factors have enabled assets to appreciate considerably over the last several months. While the constructive long-term uptrend should continue, the market can use a rotation, pullback, and consolidation phase in the near term.

In-Line PCE Is A Big Plus

The market has been “worried” about inflation coming back recently. The latest CPI and PPI readings were slightly higher than expected. Due to the hotter-than-anticipated inflation readings and other data points, expectations for a March rate cut are essentially off the table now.

Nonetheless, the PCE, especially the core-PCE coming in line as expected, is a big plus. The core PCE is the Fed’s “preferred” inflation gauge, and the trend remains positive as the core PCE continues to trend lower.

Core-PCE Trend Remains Highly Positive

We see the consistent downtrend continuing in the core-PCE, signaling inflation continues to moderate as expected. The minor upticks, or smaller than expected decreases in the CPI and PPI could be transitory. We may see lower-than-anticipated CPI and PPI readings in future months as the transitory increase in CPI/PPI inflation concludes.

Truflation Inflation – Just 1.6%

Also, we should consider outside, non-government inflation gauges like truflation. The CPI and PCE are lagging indicators and are outdated in many respects, in my view. Therefore, an independent, real-time inflation gauge like truflation makes sense. Truflation illustrates inflation at just 1.61%, implying that inflation may already be below the Fed’s 2% target range, and the lagging core-PCE and other indicators could catch up with lower inflation readings in future months. This dynamic also implies that the Fed may be closer to easing than markets expect.

June Rate Cut Is Highly Likely

Due to odds shifting toward a later rate cut, the probability of a June cut is “only” 70%. However, we should see the likelihood of a June rate cut increase if better-than-expected inflation data comes in as we advance. Also, the odds of a rate cut by the July FOMC meeting are around 90%. Therefore, we will likely see the rate-easing cycle begin soon, and it does not make much difference if it is in May, June, or July. The most crucial factor is that a prolonged easing cycle is likely approaching, which is highly bullish for stocks and other risk assets in the long term.

The Market Moving Event

This week’s potentially market-moving event is Friday’s nonfarm payrolls report. The market expects that 190K new jobs were created in February, and the unemployment rate is projected to remain at 3.7%. We want to have a number around or slightly lower than the estimate. As recent employment reports have been “hot,” we could use a 100-200K read. This number could be positive for rate probabilities, increasing the odds of a rate cut for June and possibly even increasing the March probability of a rate cut to over 50%.

Are Valuations Too High Now?

I still don’t think valuations are high relative to the upcoming economic atmosphere. The DJIA (DJI) may appear expensive at 27 times TTM earnings. However, it looks inexpensive relative to its 18.74 forward P/E ratio projection. Also, the R2K looks cheap below a 25-forward P/E ratio, as lower interest rates should benefit the domestic economy and small/mid-cap companies, leading to multiple expansions and higher stock prices.

The Nasdaq 100-Index (NDX) may appear rich at 33 times TTM earnings, but its forward P/E ratio is only 30. Also, provided the growth and earnings power of AI and other growing industries, we may see better than expected earnings from top tech firms as we advance. Additionally, much of “froth” may be in the large cap tech names and a healthy rotation/consolidation phase can resolve the issue.

The SPX’s forward P/E ratio is around 21, but earnings growth estimates may still be too low, and the SPX could be trading around a 20 forward P/E multiple, in my view. Also, considering the future more accessible monetary environment, we could see earnings rise more than anticipated and multiples could expand, compounding the effect of higher stock prices.

The Bottom Line

The market has come a long way from the bear market lows of 2022 and the correction lows of late last year. While the market could use a temporary “cool off” period, we’re still in the early stages of the AI cycle, and there should be plenty of growth and efficiency optimization ahead for high-quality companies and the economy in general. The economy remains resilient, and corporate earnings remain solid. Moreover, the Fed will likely introduce a more accessible monetary policy soon, increasing growth and improving the overall environment for risk assets, particularly high-quality stocks. Due to the solid economic backdrop, I’m elevating my year-end SPX target to the 5,700-6,000 range.