The stock market is off to a strong start in January, with the S&P 500 up 3.25% through 1/30 (data from Morningstar). Like much of last year, gains have been concentrated in large technology companies. It is still our expectation that market participation will broaden in 2024, meaning that smaller companies and those outside of technology industries will perform well.
Corporate earnings reports thus far have been mixed. About 1/3rd of S&P 500 companies have reported earnings so far, and 79% of them have beaten estimates. This is essentially in line with the 5-year average of 77% (data from FS Insight and FactSet). However, there have been some large earnings declines by several key companies that have kept overall earnings growth muted. In short, earnings reports to this point have neither reversed nor accelerated the market’s trajectory.
The market has now rallied 20% from its October lows in about 3 months. That show of strength is significant and sends a positive signal for the rest of the year. However, the market is currently pricing in a lot of good news, in our opinion. Recent weak manufacturing reports have not discouraged the market from expecting a “soft landing” (i.e. no recession). Market participants are still expecting the Federal Reserve to reduce its key interest rate by about 1.50% before year end. While these positive outcomes may well come to fruition, they are not likely to occur in a straight line. It is likely that the market prices in the chances of at least one bad thing happening (such as fewer rate cuts or a slowing economy), which in turn would create a better risk/reward opportunity for new investments. The technical indicators show that the market is stretched on the upside, and that upward momentum is slowing. This too creates the conditions for a decline in the coming weeks.
However, there is evidence to suggest that any decline would be relatively contained and short lived. Long term investors should not be deterred by the potential for volatility in the short term. As always, we will follow our objective indicators to manage risk and tilt accounts towards the proper areas of the market.
