US Perspectives - Short-term repricing begins, but long-term fundamentals remain solid
Jul 31, 2024
- The US market has been outperforming global markets this year. The S&P 500 was up almost 19 per cent YTD through 16 July 2024. For the same period, the MSCI World ex. US rose only 6.7 per cent. Since then, the S&P 500 is -3.6 per cent, while the MSCI World ex. US is -2.1 per cent
- The worst-performing sectors in recent slide have been technology, communication services, and consumer discretionary. This is even though 2Q24 earnings in communication services and technology are forecast to rise at double-digit growth rates
- Economic growth is slowing but remains positive, and the unemployment rate is inching upward but remains near a 60-year low
- Disinflation continues, and the PCE deflator, the Fed’s preferred measure of inflation, currently stands at 2.5 per cent yoy. It has now pierced the Fed’s stated target of a 2.0 per cent symmetric range for US inflation. Slower growth and inflation should put the Fed in play to begin its monetary policy easing cycle
- Through the end of the second quarter, corporate earnings are forecast to rise 9.8 per cent yoy. If earnings rise at that rate, it would mark the fastest EPS growth since 4Q21
- Through 26 July, 41 per cent of S&P 500 companies have reported their earnings. Of the 41 per cent, 78 per cent of companies have beaten expectations, with numbers above the 5- & 10-year averages. Net profit margin in 2Q24 is set to expand to 12.1 per cent, up from 11.8 per cent in 1Q24. In 2024, earnings are forecast to rise 10.9 per cent yoy, while in 2025, US corporate earnings are expected to grow to 14.8 per cent
- Markets now expect the Fed to cut the Fed funds rate beginning in September. This is aligned with our view. We believe the FOMC will cut rates once this year—25 basis points in September. It is important to remember that the FOMC is not focused on calendar years but on the Fed easing cycle
- Market breadth has improved of late as both value and small caps have outperformed. In more concentrated bull markets, returns are lower, and the bull markets are shorter. When bull markets are broader, returns are significantly higher, and they last much longer. We look for market returns to become broader and the bull market to extend further