Mitch on the Markets

May 20th, 2024

3 Stock Market Risks To Watch In 2024

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3 Risks Investors Should Be Watching Now

I’ve recently written about strong, under-appreciated U.S. corporate earnings and a growing “wall of worry”—both of which I’ve argued are bullish for stocks looking ahead. But optimism should be balanced with an acknowledgment of risks that loom in the markets, any of which could derail stocks’ performance in 2024. There are three in particular that I think investors should be watching now.

  1. Stocks are Fully Valued, Limiting Further Upside

As of May 10th, the forward 12-month P/E ratio for the S&P 500 was 20.4. This means stocks’ valuations are running above 5- and 10-year averages, which are 19.1 and 17.8, respectively. By this metric alone, stocks look fully valued at current levels.

But we also know that in the first quarter, even as inflation measures came in hotter-than-expected and the Fed dashed hopes for rate cuts in 2024, the S&P 500 rallied by 10.6%. Looked at another way, even though investors now expect higher-for-longer interest rates—which reduces the present value of future cash flows—they were still willing to pay a premium for those future earnings.1

Adding to this risk is the observation that enthusiasm over artificial intelligence (AI) has contributed greatly to the recent rise in stock prices. The risk here, of course, is that AI fails to deliver on its promise to drive substantial productivity and profit growth. That would deem many technology companies’ meteoric gains as part of a bubble.

Market Trends You Need to Keep an Eye On

With stocks trading at elevated valuations and AI enthusiasm driving recent gains, the market presents both opportunities and risks.

To guide your investing decisions during times of uncertainty, I recommend downloading our May 2024 Market Strategy Report. It covers topics, such as:

• Americans think the Economy is lousy. Is it?
• Update on inflation & the Fed
• The market’s Fed exuberance
• Bottom line for investors

If you have $500,000 or more to invest, click on the link below to get our free report today!

Download our May 2024 Market Strategy Report2

In my view, with valuations at current levels, U.S. corporations have very little room for earnings disappointments. The good news is that earnings were better than expected in Q1, and estimates for Q2 earnings have been increasing since the start of April—which is the opposite of what we tend to see historically. For Q2, S&P 500 earnings are expected to be up +9.2% from the same period last year, which is higher than the 8.7% earnings growth expected at the end of March.

  1. Election Uncertainty = Higher Volatility

Many investors are already feeling election fatigue, and it is only May.

I will not argue against the idea that uncertainty surrounding the election may result in short-term volatility. I could easily see that being the case. But I also think investors should bear in mind that markets already know both of these candidates, and stocks have already performed well during former President Trump’s term and President Biden’s current term. I’m not suggesting stocks will do well no matter who is elected, but rather that we know from history that stocks can do well.

As an investment manager, I think it’s critical to ‘check political views at the door’ when making decisions. Politics is often filled with emotionally charged views and ideas, neither of which serve investors well and often lead to mistakes. For example, an investor could have avoided stocks during President Trump or President Biden’s tenures for the same reason—because they strongly disliked the leader and his policies. But that would have been a mistake. Stocks have risen substantially over the past eight years, and currently trade near all-time highs.

I think investors have good reason to be optimistic about 2024. Not because of how the election may unfold, but because of how the stock market tends to perform during election years. The last time the stock market fell in a presidential re-election year was 1940.

  1. The Fed Waits Too Long to Lower Rates

With the benchmark fed funds rate currently in a range of 5.25% to 5.5%, and inflation hovering around 3% to 3.5% (depending on the index cited), monetary policy is restrictive. The economy has been chugging along despite higher rates, but history reminds us that monetary policy works on a lag and deep cracks can start to take shape well before anyone realizes it.

One area of concern, in my view, could be for small- to mid-size businesses. These types of businesses employ about 75% of the private workforce, and they also tend to rely on debt more than cash-rich larger corporations. These companies’ ability to repay interest obligations is below where it was before the pandemic, and having to refinance at higher rates could impact profitability—and result in cost-cutting measures like laying off some of the workforce.

In my view, the risk of delaying rate cuts outweighs the risk of cutting too early and triggering more inflation. It remains to be seen how the Federal Reserve threads this needle. One reason for cautious optimism, however, is that there appears to be some certainty among businesses and investors that interest rates will not move any higher from here—which I think significantly reduces the possibility of a negative surprise.

Bottom Line for Investors

U.S. corporations could disappoint, even just slightly, on earnings. The U.S. presidential election could deliver a surprise twist that amplifies uncertainties beyond Election Day. The Federal Reserve could wait too long to cut rates, placing additional strain on small- and mid-size businesses, banks, and U.S. consumers—ultimately hurting economic activity.

These are all risks investors should keep in mind as the year progresses, while also remembering that better-than-expected outcomes—i.e., positive surprises—could send stocks even higher.

As an investor, I can understand the worries you may have regarding your long-term investments. Paying attention to key factors that shift market performance can help you stay on track. Today, I am offering our free May 2024 Market Strategy Report3, which this month covers the following topics:

• Americans think the Economy is lousy. Is it?
• Update on inflation & the Fed
• The market’s Fed exuberance
• Bottom line for investors

If you have $500,000 or more to invest, click on the link below to get our free guide today!

Disclosure

1 J.P. Morgan. May 3, 2024. https://www.jpmorgan.com/insights/outlook/market-outlook/tmt-midnight-musings-3-risks-keeping-us-up-at-night?jp_cmp=pw/ContentSharedViaAdvisorChannel/ema/OFTtemplate05032024&mkt_tok=Mzc3LVJFUS05NTcAAAGS39_HvGDP3uruz1NUYElB05WwDETFCHK8HVpijy-a9AECfMh3ygVvB3k6kZTMUQmIYNv91gpKIneFXrznY1_YGs8h6MGj4EReGBtUvXK8htr7kw

2 Zacks Investment Management reserves the right to amend the terms or rescind the free Market Strategy Report offer at any time and for any reason at its discretion.

3 Zacks Investment Management reserves the right to amend the terms or rescind the free Market Strategy Report offer at any time and for any reason at its discretion.

DISCLOSURE

Past performance is no guarantee of future results. Inherent in any investment is the potential for loss.

Zacks Investment Management, Inc. is a wholly-owned subsidiary of Zacks Investment Research. Zacks Investment Management is an independent Registered Investment Advisory firm and acts as an investment manager for individuals and institutions. Zacks Investment Research is a provider of earnings data and other financial data to institutions and to individuals.

This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. Do not act or rely upon the information and advice given in this publication without seeking the services of competent and professional legal, tax, or accounting counsel. Publication and distribution of this article is not intended to create, and the information contained herein does not constitute, an attorney-client relationship. No recommendation or advice is being given as to whether any investment or strategy is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole.

Any projections, targets, or estimates in this report are forward looking statements and are based on the firm’s research, analysis, and assumptions. Due to rapidly changing market conditions and the complexity of investment decisions, supplemental information and other sources may be required to make informed investment decisions based on your individual investment objectives and suitability specifications. All expressions of opinions are subject to change without notice. Clients should seek financial advice regarding the appropriateness of investing in any security or investment strategy discussed in this presentation.

Certain economic and market information contained herein has been obtained from published sources prepared by other parties. Zacks Investment Management does not assume any responsibility for the accuracy or completeness of such information. Further, no third party has assumed responsibility for independently verifying the information contained herein and accordingly no such persons make any representations with respect to the accuracy, completeness or reasonableness of the information provided herein. Unless otherwise indicated, market analysis and conclusions are based upon opinions or assumptions that Zacks Investment Management considers to be reasonable. Any investment inherently involves a high degree of risk, beyond any specific risks discussed herein.

The S&P 500 Index is a well-known, unmanaged index of the prices of 500 large-company common stocks, mainly blue-chip stocks, selected by Standard & Poor’s. The S&P 500 Index assumes reinvestment of dividends but does not reflect advisory fees. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor. An investor cannot invest directly in an index.

The Russell 1000 Growth Index is a well-known, unmanaged index of the prices of 1000 large-company growth common stocks selected by Russell. The Russell 1000 Growth Index assumes reinvestment of dividends but does not reflect advisory fees. An investor cannot invest directly in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.

Nasdaq Composite Index is the market capitalization-weighted index of over 3,300 common equities listed on the Nasdaq stock exchange. The types of securities in the index include American depositary receipts, common stocks, real estate investment trusts (REITs) and tracking stocks, as well as limited partnership interests. The index includes all Nasdaq-listed stocks that are not derivatives, preferred shares, funds, exchange-traded funds (ETFs) or debenture securities. An investor cannot invest directly in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.

The Dow Jones Industrial Average measures the daily stock market movements of 30 U.S. publicly-traded companies listed on the NASDAQ or the New York Stock Exchange (NYSE). The 30 publicly-owned companies are considered leaders in the United States economy. An investor cannot directly invest in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.

The Bloomberg Global Aggregate Index is a flagship measure of global investment grade debt from twenty-four local currency markets. This multi-currency benchmark includes treasury, government-related, corporate and securitized fixed-rate bonds from both developed and emerging markets issuers. An investor cannot invest directly in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.

The ICE Exchange-Listed Fixed & Adjustable Rate Preferred Securities Index is a modified market capitalization weighted index composed of preferred stock and securities that are functionally equivalent to preferred stock including, but not limited to, depositary preferred securities, perpetual subordinated debt and certain securities issued by banks and other financial institutions that are eligible for capital treatment with respect to such instruments akin to that received for issuance of straight preferred stock. An investor cannot invest directly in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.

The MSCI ACWI ex U.S. Index captures large and mid-cap representation across 22 of 23 Developed Markets (DM) countries (excluding the United States) and 24 Emerging Markets (EM) countries. The index covers approximately 85% of the global equity opportunity set outside the U.S. An investor cannot invest directly in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.

The Russell 2000 Index is a well-known, unmanaged index of the prices of 2000 small-cap company common stocks, selected by Russell. The Russell 2000 Index assumes reinvestment of dividends but does not reflect advisory fees. An investor cannot invest directly in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.

The S&P Mid Cap 400 provides investors with a benchmark for mid-sized companies. The index, which is distinct from the large-cap S&P 500, is designed to measure the performance of 400 mid-sized companies, reflecting the distinctive risk and return characteristics of this market segment.

The S&P 500 Pure Value index is a style-concentrated index designed to track the performance of stocks that exhibit the strongest value characteristics by using a style-attractiveness-weighting scheme. An investor cannot directly invest in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.
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