We have written about the likelihood of a shallow market pullback for several months now. After 5 months of nearly uninterrupted gains in the stock market, April saw a 4.1% decline in the S&P 500. This corrective action may continue for a few more weeks, but several key indicators suggest significant downside is not likely. The weight of the evidence suggests this period is a ‘pause that refreshes’ and sets the stage for the next leg higher in this ongoing bull market.
Much of the market’s attention has been on inflation data and its potential impact on Federal Reserve policy. Inflation readings have been stubbornly high, which have reduced market participants’ expectations for Fed rate cuts. The number of expected rate cuts in 2024 has fallen from 7 at the beginning of the year, to 3 at the beginning of April, to 1 as of May 1st (data from CME Group). We do not have an edge when it comes to forecasting inflation data or Federal Reserve policy. But it is worth noting that the inflation surprise in March was entirely due to a dramatic increase in auto insurance prices, which is a lagging indicator and not likely to be sustained at this pace. More importantly, the reduction in market expectations for rate cuts leaves less room for negative surprises and more room for positive ones.
We remind clients that they are not invested in economic data points or Fed policy; they own companies whose long-run value is determined by profits. Corporate earnings have been strong so far this quarter, as 80% of companies that have reported have beaten estimates. Analysts are currently expecting 10.8% earnings growth over last year for 2024, according to data from Factset. This positive earnings environment can drive stocks higher over the course of the year, in our view. We will continue to follow our process to tilt portfolios towards areas of strength in the market.
