Is the Stock Market on the Brink of a Reversal?

Did you know that the stock market has surged by around 14% in 2024? Yet company profits have fallen, highlighting a paradox many investors overlook.

Understanding Market Trends

In the ever-changing landscape of the stock market, one mistake keeps popping up—assuming that a rising market will keep climbing indefinitely. So far in 2024, the S&P 500 is up roughly 14%, and the economy is still growing at 2.88% above inflation. Unemployment has ticked up slightly but remains near record lows, and inflation is inching closer to the Fed’s 2% target. Yet despite these broadly positive indicators, corporate earnings have not kept pace.

"Once the market is moving in one direction, it will always continue to do so."

This mindset creates blind spots: investors focus on recent gains and ignore signals that underlying fundamentals—like profits—might not support further advances. History shows that markets and economies move in cycles, not straight lines, and assuming otherwise can lead to costly mistakes.

The Disconnect Between Stock Prices and Company Earnings

What really drives stock prices? Future expectations, not past results. Even though S&P 500 earnings fell in Q1 and are projected to grow less than 2% by mid-year, the index has priced in about 12% earnings growth for the full year. In other words, investors are betting on profits that haven’t materialized yet.

Meanwhile, the Chicago Board Options Exchange Volatility Index (VIX), known as “The Fear Gauge,” sits at a five-year low of around 12. By comparison, it spiked to 53 during the March 2020 crash when stocks plunged 30% in five weeks. Calm markets and low volatility can feel safe, but extended complacency often gives way to sharp sell-offs when expectations aren’t met.

Key Factors Influencing the Market’s Future

As we head into the second half of 2024, several major themes could tip the balance between further gains and a meaningful pullback:

• Concentration of Profits: A handful of stocks—often called the “Magnificent Seven”—now represent over one-third of the S&P 500’s total value. Their outsized gains mask weakness across the remaining 493 companies.
• The November U.S. Election: Since 1932, the stock market has been positive in 18 of 22 presidential election years. If the market stays up, incumbents win about 61% of the time; if it falls, they lose roughly 75% of the time.
• Federal Reserve Policies: The Fed has held rates at 5.25%–5.5% but now projects one or two rate cuts by year-end, down from the three or four cuts forecast back in December.

Artificial Intelligence’s Growing Influence

Artificial intelligence remains a key driver behind the “Magnificent Seven.” Tech giants like Microsoft (+21%), Nvidia (+172%), and Apple (+177%) have delivered outsized profit gains, fueling a perception of broad strength. While AI is a legitimate growth catalyst, bubbles often form around exciting new technologies. If AI valuations get too stretched, it could trigger a market-wide reappraisal of risk and reward.

The Upcoming Political Landscape and Its Implications

Political outcomes matter for sentiment and policy. Election year behavior shows that strong markets tend to favor incumbents, while downturns shake confidence. A positive market into November would bolster the current administration’s re-election chances, but subtle shifts in investor sentiment ahead of the vote could foreshadow different outcomes. Keep in mind the sample size is small and other factors always play a role, yet history offers intriguing clues.

Insights from the Federal Reserve Meeting

At its latest meeting, the Federal Open Market Committee left interest rates unchanged at 5.25%–5.5% but downgraded the number of expected cuts for 2024. In December, many policymakers anticipated three or four cuts; now they foresee only one or two. This illustrated a shift from “Goldilocks” optimism to caution. The Fed admits it can’t predict every twist and turn in economic growth or inflation, reinforcing the importance of flexibility when building portfolios.

The Importance of Long-Term Investing

Short-term volatility and shifting forecasts can feel unsettling, but the market’s long-term trajectory has historically rewarded patience and consistency. By focusing on fundamentals—diversification, valuation, and risk management—investors can navigate cycles without trying to time peaks and troughs.

Key takeaway:
Stay committed to a long-term strategy, balance risk through diversification, and avoid letting low volatility breed complacency.

What factors do you believe will most impact the market’s trajectory in the coming months? Let’s keep the conversation going!