Stock Market

Booming Stocks Suggest Bright Horizons as Economic Indicators Strengthen

The closing of a spectacular quarter for the stock market has brought with it a wave of optimism, propelled by the belief that the Federal Reserve is on course to engineer a delicate balance in economic adjustment known as a 'soft landing.' This event is anticipated to continue fueling the robust performance of Corporate America.

Investors witnessed the S&P 500 achieving its 22nd record high of the year, an uplifting result sparked by compelling economic data that seems to counterbalance recent comments by Federal Reserve officials, implying that rate cuts are not on the immediate horizon. A remarkable US$4 trillion surge in U.S. equity values over the quarter left skeptics dumbfounded and prompted a flurry of analysts to revise their 2024 forecasts upward.

"We believe that the aggregation of market sentiment about the direction of economic fundamentals, rather than individual forecasts, is the main driver of stock market pricing," stated Lori Calvasina, Head of U.S. Equity Strategy at RBC Capital Markets.

The day's trading session closed on a high note, albeit with earlier fluctuations as investors analyzed comments from Fed Governor Christopher Waller who expressed the need for "several months of better inflation data" before considering a reduction in rates. Ahead of significant economic indicators and comments from Fed Chair Jerome Powell on Friday—a day when markets would remain closed—traders displayed caution.

The S&P 500 index surpassed the 5,250 mark, culminating in a quarterly rally exceeding 10 percent. Not since 1950 has the equity benchmark experienced back-to-back double-digit gains so frequently, a phenomenon highlighted by historical Bloomberg data. Meanwhile, two-year yields, which closely reflect immediate Federal Reserve policy changes, increased slightly in a shortened trading session preceding the holiday weekend, and the dollar continued its climb, wrapping up a strong quarter.

"Whether right or wrong, it's unlikely expectations of a rate cut in June will change unless inflation persists and if the labor market becomes a significant force behind this increase," suggested Chris Larkin, Managing Director of Trading at E*TRADE Financial from Morgan Stanley. This sentiment emphasizes the need for continuous positive inflation and labor data to influence policy adaptations.

Reports on economic performance indicate substantial improvements in the government's principal indicators — GDP and consumer spending, towards the end of the previous year. A marked rise in consumer confidence towards the end of March, underpinned by the stock market's successes and the prospect of easing inflation, has contributed to the positive economic mood.

According to Chris Zaccarelli, Chief Investment Officer at Independent Advisor Alliance, the strength of the U.S. economy, propelled by enduring consumer spending, lays a strong foundation for the next earnings season, which is poised to commence next month. Zaccarelli also contends that those anticipating an imminent recession may be overlooking a significant stretch of prosperous market conditions.

In a bold predictive update, RBC Capital Markets' Calvasina forecasts the S&P 500 to finish the year at the heightened level of 5,300, aligning with the consensus for a rising real U.S. GDP—a clear endorsement for the stock market. Previously, her target was established at 5,150.

Despite the rush of achievements marking the S&P 500's performance this year, concerns regarding the sustainability of the market's heat are emerging. Nonetheless, a historical "undefeated" technical indicator, the Relative Strength Index (RSI), has remained above the value of 50 for 100 consecutive trading sessions, a longevity noted by SentimenTrader. Following similar displays of endurance in previous instances, the S&P 500 has historically maintained gains in the subsequent months, lending confidence to the current trend's persistence.

Dan Wantrobski, Director of Research at Janney Montgomery Scott, advises investors, "For now, do not fight the trend," but also cautions to "keep at least one eye on the exits" considering the stubborn nature of inflation, macroeconomic uncertainty, and a potentially turbulent political season on the horizon.

Even as valuations rise, with the equal-weighted S&P 500 index hitting a Price-to-Earnings (P/E) ratio of 17, historical trends show that the index has the capacity to escalate further—even when trading beyond what is considered 'fair value,' according to strategists at Goldman Sachs Group Inc. led by Ryan Hammond. This data suggests that the index may still have room to grow, rewarding investors who maintain their market positions.

Goldman's strategists also point out that for those edgy about overvaluation or economic risks, the cost for downside market protection is currently appealing, signaling a window of opportunity for investors looking to safeguard their portfolios.

Historical patterns, noted by Bespoke Investment Group, show a small downtick following two consecutive quarters of double-digit percentage gains post-World War II. However, on average, the S&P index has appreciated by an impressive 12.27 percent one year later. Ryan Grabinski of Strategas Securities examined the S&P 500's performance over periods when the index rose approximately 27 percent over five months. Out of 130 such instances, only one resulted in a negative return a year later, indicating strong forward momentum.

Corporate Highlights:

Apple Inc. has reportedly accelerated production of new iPads overseas, anticipating an early May launch, as informed by individuals familiar with the proceedings. Home Depot Inc. has announced plans to procure $12.5 billion in debt, facilitating its intended acquisition of building-products distributor SRS Distribution Inc. Walgreens Boots Alliance Inc. has revised its fiscal 2024 projections, referencing a challenging retail scenario and diminishing consumer spend. B. Riley Financial Inc., a specialized investment bank currently under scrutiny for past business partnerships, has been granted an extension to deliver requisite financial documentation to its lenders. Palantir Technologies Inc. received a downgrade to 'sell' from Monness, Crespi, Hardt & Co. due to an "egregiously rich" valuation. Estee Lauder Cos.'s stock was elevated to 'buy' by Bank of America Corp., following the bank's conclusion that earnings had reached their low point. Country Garden Holdings Co., one of China's leading developers, alerted shareholders of a likely delay in submitting annual results, adding complexity to debt restructuring initiatives after a default the previous year.

Key Events This Week:

Reflecting the holiday spirit, the stock exchanges across the U.S. and several other nations will be closed on Good Friday, although the U.S. federal government will remain operational. The same day will also see significant financial data releases, including the U.S. personal income and spending and the PCE deflator. Moreover, key figures such as San Francisco Fed President Mary Daly and Fed Chair Jerome Powell are scheduled to deliver speeches, potentially influencing market sentiment.

Market Moves Snapshot:

By the close of trading in New York, the S&P 500 had marginally increased by 0.1 percent, while the Nasdaq 100 saw a slight dip of 0.1 percent. The Dow Jones Industrial Average matched the S&P's rise. In a relatively static international scene, the MSCI World index showed little change.

In the currency sphere, the Bloomberg Dollar Spot Index nudged up by 0.1 percent, as the euro, British pound, and Japanese yen saw modest movements against the dollar. Within the realm of cryptocurrencies, both Bitcoin and Ether posted gains, up by 2.9 percent and 1.6 percent, respectively.

Bond markets witnessed the yield on 10-year Treasuries modestly climbing by one basis point. Meanwhile, yields on Germany and Britain's 10-year bonds remained mostly steady.

Finally, in the commodities market, West Texas Intermediate crude enjoyed a 2 percent hike, closing at $82.99 a barrel. Spot gold also shined brighter with a 1.2 percent increase, reaching $2,221.19 an ounce.

The information herein, sourced from Bloomberg, provides insights into the recent performance and immediate prospects of the financial and commodity markets, serving as a valuable gauge for investors navigating the current economic landscape.

In conclusion, the stock market's impressive close to the quarter coupled with strong underlying economic indicators present a buoyant backdrop for investors. While caution is advised in light of persistent inflation and macroeconomic uncertainties, the persistent strength in market fundamentals suggests a potential continuation of this bullish trend. The awaited comments from Fed officials and additional economic data will provide further guidance to market participants looking to position themselves effectively in this dynamic financial environment.

Having reached the upper echelons of optimism and witnessing historical milestones, the prospect of continued growth in the stock market is a testament to the resilience and underlying confidence in the U.S. economic machine—as exemplified by the S&P 500's landmark performance and positive corporate highlights. Investors and strategists alike await future developments with anticipation as Corporate America steers towards its next earnings season, powered by an economy that, for now, appears to be on solid ground.