Evening Brief – 02.27.24
Time to Assess
Now that the S&P 500 has surpassed 5,100, it’s time to assess the rally. Given that there are still 10 months left in a presidential election year, which has traditionally been a good year for the markets, Wall Street appears to be as mistaken about the endurance of this bull market as it was about forecasting a recession.
Consider the purported “high” P/E ratio. According to FactSet, the S&P 500’s forward 12-month P/E ratio is 20.3x, which is higher than the 5-year average of 19x and the 10-year average of 17.7x.
After removing the Magnificent 7 and FAANG stocks, the S&P is trading at a 15x multiple, signaling that the rest of the market is far from pricey, based on the S&P’s future 12-month earnings of $250.
Much of Wall Street still expects a recession, and money has been piling up on the sidelines, with current estimates totaling $6.1 trillion. Having cash lying in money markets paying 5% to 5.5% is appealing, but experiencing what appears to be one of the greatest stock market opportunities of all time is equally appealing. Longer term, the S&P 500 has grown by only 5.9% since January 4, 2022, when the AI frenzy began.
Meanwhile, the current amount of margin debt of around $771 billion is considerably below the peak set in the fourth quarter of 2021, when margin debt hit $935 billion. As a result, the three major averages are approaching all-time highs without using excessive leverage.
Bond yields have backed up throughout the curve, but equities in all 11 S&P sectors have risen in the last two weeks. Those who believe the market is dominated by a small number of mega-tech stocks should look at strong participation in the industrial sector, non-bank fintech, and large-cap healthcare stocks to understand that the market is broadening.
With fourth-quarter earnings season nearing an end, FactSet’s latest report said that with 79% of S&P 500 companies reporting results, 75% have reported a positive EPS surprise and 65% have reported a positive revenue surprise. First-quarter guidance has been mixed, with many companies within each of the sectors pointing to a solid first quarter of top- and bottom-line growth.
It would not be unusual to see some consolidation while we await the March economic reports. This period also allows investors to see how the bond market responds to larger Treasury auctions amid $34 trillion in US federal debt.
Despite all the favorable indicators pointing to a rising market, this issue carries the danger that can derail a strong equities market. That’s something to examine and take seriously, given the scale of the debt and who will pay it all. For the time being, the equity markets are looking past it.