By the Curmudgeon with Victor Sperandeo

U.S. Stocks are Extremely Expensive:

The 20+ % rally in the S&P 500 since the end of October 2023 was mostly based on price-to-earnings (P/E) ratio expansion. As of May 3, 2024, the S&P 500's P/E ratio is 26.65, which is a 15.33% increase year-over-year. That’s up from 23.27 last quarter and 22.23 one year ago, which is a 6.51% increase from last quarter and 11.53% increase from one year ago. It’s also some 11% above its 10-year average. The median S&P 500 P/E ratio is 17.89, with a typical range of 19.89 to 28.09.

Traders and “investors” are now looking for reasons to justify the high valuations and want to see bigger growth ahead.

“There’s a substantive level of optimism baked in, and subsequently, considerable downside if disappointments arise,” said Keith Buchanan, senior portfolio manager at GLOBALT Investments. “(Earnings) Guidance is critically important this season,” given high valuations, he added.

Corporate Earnings Guidance will be Crucial for the Market:

With U.S. economic growth (GDP) falling to an almost two-year low last quarter, inflationary pressures lingering and uncertainty over interest rate cuts, the bar has been raised for corporate earnings growth.

“You have to substitute something else if you’re not going to get those rate cuts,” said Quincy Krosby, chief global strategist at LPL Financial. “And it had to be guidance because what else is there going to be?”

“We certainly remain vigilant on guidance with some of the consumer-related companies in particular, and that lower-end consumer seems to be under a bit of pressure,” said Mona Mahajan, senior investment strategist at Edward Jones.

Investors will be bracing for earnings forecasts from the biggest U.S. retailers, most notably Walmart Inc. and Target Corp., when they report results later this month as well as the latest read on consumer sentiment next week.

“One of two things has to happen between now and the end of the summer: either guidance improves dramatically, or interest rates come down,” said Matt Maley, chief market strategist at Miller Tabak + Co. “Otherwise, we may see another leg lower and probably a full correction in the S&P 500.”

Hopes of Fed Rate Cuts Buoy Stocks:

Stocks rallied on Thursday and Friday after the Fed Chair Powell said the Fed would not be RAISING RATES anytime soon AND the BLS jobs report came in weaker than expected. Two rate cuts are now expected this year, according to the CME Fed Watch Tool. Expectations of a September rate cut rose to roughly 70% on Friday, up from around 60% on Thursday, according to the CME.

Could that optimism possibly be premature?

“The Fed just told you: ‘We’re not hiking but we don’t have the confidence to cut yet,’” said Seaport Research Partners macro strategist Victor Cossel.

Stock Market Outlook:

While Friday’s rally felt encouraging, it wasn’t all that convincing. The S&P 500 is still 2.8% below its record high of 5,265, and it hasn’t been able to retake its 50-day moving average near 5,130. Until it convincingly climbs above that important technical level, buyers should think twice about betting on a continued rally.

The S&P 500 has support near 5,000, but if it breaks, the next stop would be the 200-day moving average of about 4,700, which represents an 8% drop from here. That average is historically where buyers have tended to come in to prop the index up, as long as nothing has changed dramatically for the worse.

Caveat Emptor: When the 10-year Treasury note yield was at 4.5% in mid-November, the S&P 500 was at 4,500. This past Friday, the 10-year yield was also at 4.5% but the S&P 500 climbed to 5,127.79.

Victor’s Comments:

Major western markets around the world are all at new highs. The UK economy is in terrible shape, yet the FTSE 100 hit a fresh record high on Friday. Also see the DAX (Germany), CAC 40 (France), HANG SENG (Hong Kong), and CHINA- all in up trends rallying off lows. The Nikkei is up 14.26% YTD and looks like the S&P 500 with respect to valuations.

Equities are like water in the desert. Be long or flat is my view. I’m a bull on global equities.

Cartoon of the Week:

Cartoon of cows sitting on a hill looking up at a bird

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Conclusions:

Overall, the combination of Fed rate cut expectations and positive economic data has buoyed U.S. stocks, creating an environment of cautious optimism for investors.

End Quote (is it obsolete?):

"I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful."

— Warren Buffett

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Be well, success and good luck. Till next time………………………..

The Curmudgeon
ajwdct@gmail.com

Follow the Curmudgeon on Twitter @ajwdct247

Curmudgeon is a retired investment professional. He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996. He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.

Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1971) to profit in the ever changing and arcane world of markets, economies, and government policies. Victor started his Wall Street career in 1966 and began trading for a living in 1968. As President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.

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