The S&P 500 is rising again on positive news about inflation and interest rates, but some top strategists believe the rally could soon falter.
U.S. stocks soared on the news, with the growth-heavy Nasdaq Composite Index hitting a new record and the S&P 500 expected to rise 14% in 2024 after surging 24.2% last year.
Watch out for upcoming fixes
But instead of popping the champagne, many market watchers are worried about stock prices falling.
Adam Phillips, managing director of investments at EP Wealth Advisors, said in an interview that U.S. stocks are weaker than they look. He noted that a handful of large growth stocks have driven much of the S&P 500’s gains, and that narrow market breadth hides shortcomings in dozens of smaller companies. If those big names pull out, it could be a shocking wake-up call for investors.
“Just last month, the S&P 500 was up nearly 3%, and over 60% of that return was driven by Nvidia,” Phillips said earlier this week. “And if you look at the S&P 500 on an equal-weighted basis, it’s generated negative returns over the last month. So I think it’s really important to look internally for signs of market health that suggest the market is, potentially, not as healthy as it appears.”
Phillips thinks it’s fair to be skeptical of the rally until a broader range of stocks starts to perform well. Companies could catch up with the tech giants by posting impressive profits, but they probably won’t have a chance to do so until the second-quarter earnings season begins in mid-July.
Meanwhile, Phillips is troubled by investor enthusiasm despite a lack of key market drivers and mixed economic data.
Anthony Sagrimbene, chief market strategist at Ameriprise Financial, is concerned about slowing economic growth. While slowing inflation is good news, it’s fair to draw a pessimistic conclusion from May’s price growth data: The U.S. economy is not doing well.
“If the economy looks like it’s slowing more sharply, which might suggest the Fed is a little bit misguided or not paying attention to the trend of slowing growth, then I think we could see another 5% or 10% correction,” Sagrim-Bene said in a recent interview.
Sagrimbene said high interest rates over a long period have kept inflation in check but have also hurt the economy, which is why the sooner rates are lowered the better.
“The longer interest rates remain at these levels, the more pain they will cause to accumulate in the economy,” Sagrimbene said. So looking at historical data like employment and inflation will likely force the Fed to respond more nuanced, much like the ECB is doing now to manage growth when interest rates are at these high levels.”
But Sagrimbene believes investors need not worry about future stock price declines.
The next sell-off will likely be modest, as people who missed the rally will likely jump at the chance to get in. And with $6 trillion in money market accounts, double the long-term average, there’s plenty of capital on the sidelines, Sagrimbene said.
Whether investors should jump into stocks given conflicting economic data, high interest rates and expensive valuations is another matter.
Gene Goldman, chief investment officer at Cetera Investment Management, noted that the S&P 500 is trading at 21 times forward earnings, which is ambitious in this context.
“High valuations require low interest rates and low inflation, neither of which we have right now,” Goldman said in a recent interview. “So they’re priced at absolutely perfection.”
Like Phillips, Goldman noted that growth stocks with sky-high expectations are driving market returns and valuations, even though they often underperform in election years. He expects big selloffs this summer unless mega-cap stocks continue to defy gravity.
Goldman said the market correction is likely to be short-lived. He said the S&P 500 could rally back to its 200-day moving average, just above 4,800. While an 11.5% drop is not exciting, the investment chief noted it’s smaller than the average decline of 14.2%.
Bullish view on continued profits
But some strategists Business Insider spoke to recently rejected the idea that investors should be cautious.
Shep Perkins, investment chief at Putnam Investments, expects U.S. stocks to gradually climb over what he calls the “wall of fear” as many investors remain skeptical of the rally. The key is that profit growth has resumed, which should support further gains.
“Earnings in the S&P 500 index are starting to accelerate again after being flat for the past year or so,” Perkins said, “and that’s typically a good sign for stock prices to rise.”
Garrett Melson, portfolio strategist at Natixis Investment Managers, said the S&P 500 could add another 10% to its gains this year as investors who have been holding back on stocks admit defeat.
“I think FOMO is going to be an issue here again,” Melson said. “But I still think that from a fundamental and technical standpoint, prices are going to continue to trend higher.”
10 ways to invest despite drawdown risks
Even those bracing for a pullback are still holding their own in the bull market.
Sagrimbene sticks to his overweight prediction US Stocks This is due to the country’s strong growth, despite the risk of short-term problems. uppercase letter He added that as long as interest rates remain high, bonds will be more attractive than small and mid-cap stocks.
In terms of sector, Sagrimbene said: Daily necessities He is also selectively bullish on the sector as it has defensive characteristics and pricing power. technology This stock has been gaining attention since it has seen impressive growth.
Both Sagrimbene and Goldman said: Europe and JapanIt has performed well this year and should hold up even if U.S. stocks fall. Value Stocks and Small hatBoth stocks have relatively attractive valuations.
Phillips is most bullish on stocks in less obvious sectors. energy and IndustryEnergy companies generate a lot of free cash flow and net profits, plus they act as a hedge against risks like inflation and geopolitical issues, the latter also being true for defense companies within the industrial sector, which is also one of the biggest beneficiaries of increased infrastructure spending, he said.
