| Do Not Fear. The Bull Market Is Here (To Stay) By: Ethan Feller June 22, 2024 | As the stock market surges to record highs practically daily, investors face a crucial question: is this the beginning of an extended bull market? I would say that the answer is a resounding yes. Despite the noise of geopolitical tensions and economic uncertainties, the fundamentals are rock-solid. A resilient economy, impressive earnings growth, and transformative advancements in AI are setting the stage for sustained upward momentum. Furthermore, anticipated monetary expansion and hefty fiscal deficit spending are further buoying the market and economy. This isn't a fleeting moment, but a powerful trend backed by robust evidence. Let's dive into the factors driving this bullish momentum and talk about a few powerful methods for identifying the leading sectors and picking winning stocks. 1. Resilient Economy The strength of the US economy continues to surprise to the upside, with the labor market remaining persistently strong, and GDP growing above trend. Estimates from the Federal Reserve Bank of Atlanta are currently for annual GDP growth of 3.1%. Unemployment is also pinned to lower levels. Even after two years of extremely restrictive monetary policy the unemployment rate is still just 4.0%. Analysts have unsuccessfully been forecasting rising unemployment for most of the last two years, and now that we are approaching expansionary policy it seems the dire rise may never come. Furthermore, the US household balance sheets are as secure as they have been in decades. Mortgage payments as a percentage of disposable income are below 10%, the lowest level going back to 1980, and household wealth recently registered new all-time highs of $150 trillion. Excess disposable income, along with the wealth effect will continue to drive consumer spending, and comfortable household leverage significantly limits systemic risk. 2. Monetary Expansion on the Horizon Liquidity is arguably the most important factor in leading stock returns. The Federal Reserve is very close to changing their policy stance, with expectations shifting from high interest rates and restrictive monetary policy to cutting rates and increasing liquidity by year end. Lower rates will increase lending and spending, and likely power the stock market higher. Although rate cutting policy has been delayed this year as high inflation persisted longer than expected, we are getting evidence that disinflation is taking hold. When inflation rates were reported last week in the form of CPI, we saw that inflation had actually come in below forecasts, further encouraging market participants that price normalization was coming. As long as inflation continues to trend down, we can expect the Fed to cut rates. 3. Impressive Earnings Growth Along with liquidity, the other most important driver of stock market returns is earnings growth, and this market has it in spades. For Q2 2024, S&P 500 earnings are projected to rise by +8.6% compared to the same period last year, driven by a +4.6% increase in revenues. Most notably, the Tech sector stands out with an impressive +15.1% earnings growth for Q2, contributing significantly to the overall market performance. Remarkably, the "Magnificent 7" tech giants are expected to see a whopping +25.4% increase in earnings on +13% higher revenues. While the Tech sector shines, several other sectors are also showing positive trends. The Medical sector anticipates +19.1% earnings growth, Energy is up +12% after several quarters of decline, and Consumer Discretionary and Finance sectors expect +10.2% and +9.6% growth, respectively. For the full year 2024, S&P 500 earnings are projected to grow by +9.2%, recovering from last year's modest decline. Altogether, this data reflects a continued resilience in and shows why investors can remain optimistic moving forward. 4. AI Revolution Charges Ahead The explosion of Artificial Intelligence is profoundly bullish for the economy and stock market due to its transformative potential across various industries. Many experienced investors believe it will be as significant to markets as the proliferation of the internet was. As artificial intelligence technologies continue to advance, they enhance productivity, efficiency, and innovation, driving economic growth. Companies deploying AI solutions can streamline operations, reduce costs, and gain a competitive edge, leading to higher profitability and shareholder returns. Moreover, AI's ability to analyze vast amounts of data and generate actionable insights enables businesses to make more informed decisions, further fueling expansion and market performance. The effect on productivity is especially notable. In Q4 2023 the US Bureau of Labor Statistics productivity gains at 3.2%, well above the long-term average of 2.1% demonstrating the strong effects the technology is already having. 5. Fiscal Deficits Keep the Economy Buoyant We covered monetary policy, but what about the fiscal side? For better or worse the US government has been very liberal with spending and is running a significant deficit. And while I can sympathize with the fiscal hawks and their concern for excessive deficit spending, a lot of it is going to a good cause. Between the Inflation Reduction Act and the Chips Act, there is a huge amount of money being injected into exciting and necessary infrastructure investments. These legislative packages incentivize investment in clean energy infrastructure and domestic chip manufacturing, creating jobs and fostering innovation across these critical sectors. On the clean energy side, the investments in nuclear energy are especially exciting as the trend towards nuclear is really picking up and is extremely promising. This focus on infrastructure not only strengthens national security but positions the US to cement its position as a leading energy producer globally, and paves the way for advancement in semiconductors, which are only growing in importance. It also increases the country's manufacturing abilities restoring some of the jobs that were lost during the period of globalization, likely resulting in economic optimism. These investments will have far-reaching implications and should benefit many sectors of the economy. Continued . . . |
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