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Can the Bull Market Continue to Run in 2024? Key Factors to Watch Midyear
Dr. Mahnoosh Mirghaemi
June 3, 2024
7 min read
Despite NVIDIA’s impressive earnings last week, markets took a pause after a strong rally, with the S&P 500 still up about 10% year-to-date. This consolidation is a healthy sign of the market taking a breather. As we approach midyear, several critical factors will determine whether the bull market can continue its upward trajectory.
Broadening Momentum: While U.S. large-cap technology stocks have led the charge, increasing activity in cyclical sectors and international markets indicates a potential broadening of the rally. This expansion is crucial to the sustainability of the bull market, as a diversified rally tends to be more resilient.
Volatility vs. Bull Market: April’s recent 5% correction highlighted ongoing market volatility. However, this is not seen as a sign of an impending prolonged bear market but rather a typical market adjustment.
Investors have been keenly watching inflation trends and potential rate cuts by the Federal Reserve. The first quarter saw higher-than-expected inflation, prompting the Fed to be cautious about rate cuts.
However, we expect inflation to ease in the coming months due to two primary factors: lagging effects of lower shelter and rent costs and a softening labour market, which should slow wage growth. As these real-time trends feed into inflation data, overall inflation should decline. This scenario could prompt one or two Fed rate cuts in September and December, boosting market sentiment and extending the bull market.
The health of the U.S. economy and corporate earnings are vital for maintaining stock prices. This year, S&P500 earnings are expected to grow by 10%-11%, significantly improving from last year’s 1%.
The first-quarter earnings season has been encouraging, with about 95% of S&P 500 companies reporting and nearly 80% exceeding expectations. Despite signs of economic softening, such as weaker retail sales and consumer confidence, the strong starting position of the U.S.economy suggests resilience. With annualised GDP growth at 3.4% in 2023, well above trend growth rates of 1.5%-2.0%, the economy is likely to moderate rather than enter a deep downturn. Continued earnings growth should support stock performance and the broader bull market.
Mega-cap technology and growth sectors,particularly those involved in artificial intelligence, have been central to the current bull market. The S&P 500’s heavy weighting toward technology and growth sectors underscores their importance.
While we anticipate periods of volatility in growth and technology sectors, the long-term prospects for A.I. remain robust. Innovations and productivity gains from A.I. will benefit not only tech companies but also sectors like financial services, healthcare, automotive, and manufacturing. This broad impact supports a diversified investment approach.Enthusiasm for A.I., exemplified by companies like NVIDIA, has driven significant gains, and we believe this trend will continue as A.I. advancements progress. Investors are likely to maintain core holdings in mega-cap technology and growth stocks due to their continuous innovation and solid financial health, including large cash reserves for re-investments and shareholder returns.
While growth stocks have driven much of the recent market gains, value stocks have become significantly undervalued in comparison. The price-to-earnings ratios of the S&P Value Index versus its growth counterparts are at historically low levels, seen only a few times over the past two decades.
Although value stocks are currently out of favour, their low relative valuations make them increasingly hard to ignore.The fundamentals have driven a wedge between growth and value, with growth stocks benefiting from superior earnings growth. However, this profit-growth gap is expected to narrow later this year. Analysts from Bloomberg Intelligence highlight that earnings trends for U.S. financials—the largest group in the S&P Value Index—are improving rapidly, which could fuel a revival in value stocks.
Currency traders refer to the period of lowest daily liquidity, after the end of U.S. equity trading and before markets in Wellington, Sydney, or Tokyo become active, as the “dead zone.” This period will be tested with the shift to T+1 settlement in the U.S. equity market.
Starting Tuesday, stock trades will settle in one day instead of two, increasing pressure on global currency markets where trades typically take two days to complete. This could lead to a scramble to process security-related F.X. trades late in the New York day when liquidity is thinnest, potentially increasing trading costs.
The Japanese yen has continued to weaken against its G-10 peers, nearing its 2024 low on a trade-weighted basis.Diverging monetary policies among global central banks are adding pressure to the yen.
Despite interventions by Japanese authorities, the yen’s recent losses have persisted. Central banks in New Zealand, England, and others have pushed back against immediate rate cuts,while the Bank of Japan’s policies remain relatively accommodative. Unless the Bank of Japan reduces bond purchases and raises its policy rate, the yen’s decline is expected to continue, particularly against currencies like the euro,sterling, and the kiwi dollar.
Conclusion
The bull market seems poised for continued growth, supported by moderating inflation, robust earnings, and advancements in A.I. Additionally, the upcoming shift to T+1 settlement in the U.S. equity market and the ongoing challenges for the Japanese yen are important dynamics to watch. Historical trends suggest bull markets outlast and outperform bear markets, and current conditions support a positive outlook moving forward.
Given the current market landscape, we recommend maintaining an overweight position in large-cap and mid-cap U.S.equities, balancing growth, value, and cyclical sectors. Diversification remains key to managing risk and capitalising on opportunities in a maturing bull market.
