I've been thinking a lot about markets lately, the cross currents, the outlook, the implications, the opportunities. I feel as though the broader market, the broader collective, seems to be getting it right - eventually. Yet the boy who cried wolf, well, is still crying wolf.
Here are 5 charts that I think are really important right now.
Corporate profit margins are holding up
Since higher input costs broke out post Covid and corporates pushed these costs onto the consumer, we've been told that corporate margins have only one way to go, and that is lower. Well, the opposite continues to happen. If we continue to see higher or more stable margins persist, this could be a tail wind for equities.
Earnings also continue to grow
For Q1 2024, the blended (year-over-year) earnings growth rate for the S&P 500 is 5.9%. If 5.9% is the actual growth rate for the quarter, it will mark the highest year-over-year earnings growth rate reported by the index since Q1 2022 (9.4%). What's interesting is the fact that the earnings growth is highest for US companies whose earnings mostly come from overseas. This is largely a large cap versus small cap story. I think this is really important, because remember, it's earnings that drive stock prices. Everything else is just noise.
Earnings lead to higher capital expenditure
Earnings growth is a three-quarter leading indicator for capital expenditure spending, and the continued strength in earnings suggests that we will see a strong rebound in business fixed investment over the coming quarters.
Inflation continues to moderate
Although not at the pace that you want, inflation continues to moderate. Interestingly, inflation has been tracking the low end of the interquartile range of historical global observations (since 1920) since inflation hit 8%. Impressively, economists’ predictions back in October 2022 (dotted line) have broadly been correct. What's also interesting, is that over the last century, median inflation has been more elevated over the 5 years after inflation spikes than at any point in the 5 years previously. So, there is evidence that inflation does tend to be stickier after a spike. The next little while will be interesting - so far so good.
Money on the sidelines
Finance textbooks would tell us that rising rates would increase the amount of money in cash and put downward pressure on equities and credit. What happens in reality however is very different. Both deposits are on the rise and so too are equities and credit. Maybe the current level of rates is not as ridiculous as they are made out to be. Maybe we've been too used to artificially low rates. Maybe accessibility to new asset classes such as credit has boosted fund flows to this asset class. Maybe the consumer has too much money. Maybe too many people are in jobs. We can continue to speculate, but the fact is that there is a record high US$6 trillion of cash on the sidelines.
Bonus chart
We're in a US presidential year in 2024. History tells us that this could mean something, something positive, and that is we generally see a positive year in presidential years. The S&P 500 has closely followed its typical seasonal trajectory in recent years. Looking ahead, and if history is any guide, the recent consolidation appears as though is seasonal, and could be seen as opportunistic buying ahead of upcoming tailwinds.
Investing is not linear. In fact, since March 2009, where stocks bottomed following the GFC, we have seen 28 pullbacks of at least 5% for the S&P 500. Impressively, despite these setbacks, stocks are up 644% on a price basis and 900% including dividends over that entire period. Expect bumps in the road on the way up.
Comments