Another day, another record high for stocks Another day, another record high for stocks\images\insights\article\calendar-push-pins-small.jpg March 1 2024 March 1 2024

Another day, another record high for stocks

Magnificent Seven continue to outperform.

Published March 1 2024

Bottom Line

The S&P 500 is flying, with stocks up 25% over the past four months, from an oversold 4,103 on Oct. 27 to a new intraday record high of 5,140 today. It has rallied more than 7% so far this year and is only 1% away from our full-year target price of 5,200. At the same time, benchmark 10-year Treasury yields have backed up, from an intraday basis 3.78% on Dec. 27 to 4.20% today. Given a relatively strong economy, a healthy labor market and sticky inflation, the bond market has begun to appreciate that the dual fantasies of “immaculate disinflation” and an “immaculate pivot” from the Federal Reserve on interest rates were overly optimistic.

What’s driving the divergence between stocks and bonds so far this year? The continued strong performance of the Magnificent Seven is at the top of the list. In the first two months of this year, the Mag 7 is up 11%, and the “Forgotten 493” has risen 6%. Since the beginning of 2023, the Mag 7 has ripped by 95%, S&P has rallied 35%, while the Forgotten 493 has lagged with a 19% return—impressive by any normal measure except relatively.  

Solid fourth quarter earnings The reporting season for the S&P is more than 95% complete, and it was better than expected. According to FactSet, expected revenue growth of 3.1% year over year (y/y) has risen 3.7%. Earnings, expected to rise 1.3% y/y, increased 7.8%, largely on the strength of technology companies. This marks the second consecutive positive quarter, after three consecutive with declining earnings. The earnings recession appears to have troughed in last year’s second quarter.

Our analysis suggests the strong earnings outperformance of tech stocks compared with the rest of the market will begin to fade by this year’s fourth quarter. The equity market typically begins to discount expectations some six to nine months before they occur. So, we could begin to see increased volatility and a reversion to the mean in coming months. We continue to think this rally will broaden. Underperforming domestic value, small cap growth and international stocks should play catch-up, while the growth and technology stocks slow down.

Labor market healthy Although nonfarm payrolls in January and the initial weekly jobless claims during each of the survey weeks over the past six months continue to demonstrate labor market strength, several other metrics suggest a mixed picture. Household employment lost jobs in three of the past four months, the ADP private payroll survey was down sequentially by 32% in January, Challenger layoffs in January hit a ten-month high, JOLTS are 25% below their peak from two years ago, hours worked hit a 4-year low in January, and temporary help has lost jobs in 11 of the past 12 months.

If they’re working, they will spend January’s dreadful retail sales results plunged a worse-than-expected 0.8% m/m, which neutralized a relatively strong December and were more in line with poor October and November data. All in, Christmas 2023 (October through January) spending on goods overall was relatively soft, rising only 2.9% y/y, compared with Christmas 2022’s relatively strong 7.2% gain. In contrast, spending on services remains solid. To be sure, Christmas 2023 wasn’t canceled, but it does mark the weakest holiday spending in five years, since 2018’s tepid 2.6% y/y increase. This Blue Christmas was not unexpected, as the National Retail Federation (NRF) had forecast a 3-4% annual gain this year, and we here at Federated Hermes had expected a 2-3% y/y increase. The U.S. consumer—particularly at the lower end of the income and wealth spectrum—is considerably stressed.

Manufacturing perking up? Capital goods shipments non-defense ex-air, which feeds directly into the quarterly GDP report, rose a strong 1-year high of 0.8% month-over-month (m/m) in January. Five of the six regional Fed indices we monitor improved sequentially in February, and manufacturing payrolls rose by a solid 23,000 jobs in January.

Persistent inflation January was a tough month for inflation, as several of the metrics we monitor were hotter than expected. Average hourly earnings, for example, rose 4.5% y/y in January and 0.6% m/m, which annualizes to an outsized gain of 7.2%. The Fed wants this metric to fall to 3% on an annualized basis. The core PCE (the Fed’s preferred measure of inflation) peaked at 5.6% in February 2022 and has declined to 2.8% in January 2024. But it also rose 0.4% m/m in January, which annualizes to 4.8%. The Fed’s target for this metric remains at 2%, a level the central bank hopes to achieve by year-end 2026, according to its December Summary of Economic Projections. As a result, the Fed will likely remain in a data-dependent, wait-and-see mode regarding the next monetary policy step. We’re expecting three cuts starting in the summer and avoiding the election. The consensus view that the Fed will cut interest rates by six times this year, with the first cut coming in March, has faded.

Changes to our GDP and inflation estimates The equity, fixed-income, and liquidity investment professionals who comprise the Federated Hermes macroeconomic policy committee met Wednesday to discuss the economy’s resilience and inflation’s gradual decline.

  • The Commerce Dept. revised fourth quarter GDP down from 3.3% to 3.2%, but the quality of the quarter improved, with gains in personal consumption, corporate capex, and housing. That did not change full-year GDP growth at 2.5%.
  • Commerce will flash first quarter 2024 GDP on April 25. The Blue Chip consensus raised its estimate from 1.0% to 1.7% (within a range of 0.6% to 2.6%), while the Atlanta Fed’s GDPNow slashed its estimate from 4.2% to 3.0%. We’re still expecting a post-Christmas hangover on goods spending, although spending on services is strong, as the labor market is still healthy. Manufacturing and housing may be perking up, as well. So, we increased our estimate for first quarter 2024 GDP from 1.3% to 2.2%.
  • We raised our estimate for second quarter 2024 GDP up from 1.1% to 1.8%. The Blue Chip consensus raised its estimate from 0.7% to 1.1% (within a range of -0.3% to 2.1%).
  • We expect the Fed to begin to cut interest rates by the third quarter, so we increased our estimate for third quarter 2024 GDP from 1.4% to 1.7%. The Blue Chip consensus increased its from 0.9% to 1.2% (within a range of 0.1% to 2.2%).
  • We left our estimate for fourth quarter 2024 GDP unchanged at 1.7%. The Blue Chip consensus also left its unchanged at 1.5% (within a range of 0.7% to 2.2%).
  • As a result of these quarterly increases, we raised our full-year 2024 GDP estimate from 1.9% to 2.5%. The Blue Chip consensus lifted its from 1.6% to 2.1% (within a range of 1.6% to 2.7%).
  • We left our year-end 2024 forecast for core CPI inflation unchanged at 2.9% (compared with 3.9% in January 2024), and Blue Chip remained at 2.6% (within a range of 2.3% to 2.9%).
  • We also kept our year-end 2024 estimate for core PCE inflation unchanged at 2.5% (compared with 2.8% in January 2024), while the Blue Chip lowered its from 2.2% to 2.1% (within a range of 1.9% to 2.5%).
  • We initiated our full-year 2025 estimate for GDP at 2.0%, compared with the Blue Chip’s 1.7% (within a range of 1.3% to 2.4%).
  • We initiated our year-end 2025 forecast for core CPI inflation at 2.6%, while the Blue Chip is at 2.2% (within a range of 1.9% to 2.6%). We initiated our year-end 2025 estimate for core PCE inflation at 2.1%, same as the Blue Chip (within a range of 1.8% to 2.4%).

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Tags Markets/Economy . Fixed Income . Inflation . Interest Rates . Monetary Policy .

Views are as of the date above and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector.

Growth stocks are typically more volatile than value stocks.

International investing involves special risks including currency risk, increased volatility, political risks, and differences in auditing and other financial standards.

Small company stocks may be less liquid and subject to greater price volatility than large capitalization stocks.

Stocks are subject to risks and fluctuate in value.

Value stocks tend to have higher dividends and thus have a higher income-related component in their total return than growth stocks. Value stocks also may lag growth stocks in performance at times, particularly in late stages of a market advance.

Gross Domestic Product (GDP) is a broad measure of the economy that measures the retail value of goods and services produced in a country.

Magnificent Seven: Moniker for seven mega-cap tech-related stocks Amazon, Apple, Google-parent Alphabet, Meta, Microsoft, Nvidia and Tesla.

Consumer Price Index (CPI): A measure of inflation at the retail level.

The Job Openings and Labor Turnover Survey (JOLTS) is conducted monthly by the U.S. Bureau of Labor Statistics.

Personal Consumption Expenditures Price Index (PCE): A measure of inflation at the consumer level.

S&P 500 Index: An unmanaged capitalization-weighted index of 500 stocks designated to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. Indexes are unmanaged and investments cannot be made in an index.

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