Two years ago, as the Federal Reserve ended its aggressive 75 basis point rate hike, the US stock market ended its correction and began a new round of upward trend. The explosive development of the artificial intelligence industry and changes in monetary policy expectations have driven investor enthusiasm, with the S&P 500 index crossing 5800 points for the first time.
Now in the third year of this bull market, although there have been many changes in the macro and economic environment, the market shows no signs of slowing down.
Institutions raise target prices
Last Saturday, the US stock market celebrated its second anniversary of a bull market. Since hitting the bottom of the cycle on October 12, 2022, the S&P 500 index has risen nearly 62%. Since 2024, the index has risen by over 22%, setting 46 closing records.
According to Dow Jones market data, if the increase can be maintained until the end of December, it will mark the second consecutive year that the index has risen by 20% or more, marking the first time since 1998.
Against the backdrop of the Federal Reserve's interest rate cut cycle, strong economic data performance, and rising profit expectations, Wall Street has recently raised its target levels. Goldman Sachs technical strategist Scott Rubner said he is very bullish on the US stock market, but now he is concerned that the previously set point was too low. He predicts that the S&P 500 index's significant rise in November and December this year will push the index to break through 6000 points by the end of 2024.
Lubner pointed out that data from the past 100 years shows that the market often starts to soar at the end of October. Even in election years, history has always followed this trend. On the other hand, American companies are currently in a restricted period that ends on October 25th, which means their ability to repurchase stocks is limited. He explained that the previously authorized stock buybacks worth $974 billion in September are about to be released, which will help drive a rebound in the US stock market. Finally, the demand for put options on the eve of the US election may also help further drive the surge in the US stock market.
The JPMorgan team led by Chief Investment Strategist Dubravko Lakos Bujas stated that the Federal Reserve's loose policies and China's stimulus policies are reigniting hope for post cyclical inflationary trading.
Xiao Mo believes that policy support emerged at a time when the US economy was unexpectedly resilient, with a tight labor market, persistent government deficit spending, and historic highs in stocks, credit, and housing. More importantly, corporate profit growth is expected to accelerate, from 3% in the past two years to 12% in the next two years. US companies are using pre tax income recovery for investment expenses, especially the seven giants in the artificial intelligence race. We believe that these driving factors are helping to offset the imbalanced macroeconomic weakness
According to data compiled by Bloomberg Intelligence, since 1971, the S&P 500 index has had an annualized return of 15% during interest rate cuts, with an average annualized return of 25% during non recession periods. Tom Essaye, founder and president of Sevens Report Research, a market research firm, said, "If the earnings season meets expectations, I believe the Federal Reserve will have a greater impact on the market from now until the end of the year because returns have been quite stable. Investors expect this situation to continue
What factors need to be considered
Since the second half of the year, the US stock market has experienced multiple setbacks in its upward trend. According to FactSet data, the Chicago Board Options Exchange Volatility Index (VIX) reached its highest level since March 2020 during the global market crash on August 5th. Subsequently, geopolitical and economic concerns led to a similar sharp drop in the market during the first week of September.
The first financial summary found that the cautious stance of institutions mainly stems from the following aspects. Firstly, the current valuation of the US stock market is relatively high compared to history, only slightly lower than its peak at the end of 2021. As the third quarter earnings season begins, investors will continue to focus on clues regarding the sustainability and returns of large-scale investments in artificial intelligence technology.
Secondly, geopolitical risks have escalated again, and the risk of conflict between Israel and Iran has pushed up crude oil prices, which may bring uncertainty to the path of the Federal Reserve's interest rate cuts, thereby affecting the prospects for a soft landing.
Furthermore, the US presidential election on November 5th has led many funds to choose to hedge risks to protect asset portfolio security. The latest polls show that the competition between Democratic presidential candidate Harris and Republican presidential candidate Trump may continue until the end and may involve controversial outcomes.
Research firm Ned Davis Research has found that since the end of World War II, there have been 13 bull markets in the third year of the US stock market. The median two-year increase of the previous 12 rounds was 54.4%, which means that this bull market is not particularly special compared to history. Looking ahead, the average increase in the third year is 13.3%, but the situation is not clear and the probability of ending has increased.
The report states that selling is often triggered by various catalysts. Economic recession is the most common, occurring three times in total. In addition, the bull market that began in October 1966 was ended by interest rate hikes, when the Federal Reserve began tightening monetary policy to resist a round of inflation. The bull market that began in March 2009 came to an end due to S&P's downgrade of the US credit rating and global tensions related to the European sovereign debt crisis.
The Ned Davis team expects that the current bull market will continue to meet the following criteria. Firstly, the anti inflation trend that began at the end of 2022 must continue. Since the Federal Reserve announced a significant interest rate cut last month, concerns about the possibility of inflation recovery have been spreading in the market. If investors see concrete signs of inflation accelerating again, it may trigger market panic.
Secondly, the Federal Reserve must successfully achieve a soft landing for the US economy. This means that the Federal Open Market Committee must take action to ensure slightly slower but still positive economic growth, while bringing inflation back to its target of 2%. If an economic recession begins, the stock market may fall. But there is no reason to worry about this now.
Finally, large companies must maintain profitable growth. To maintain the gradually rising valuation in recent months: According to LSEG Datastream data, the S&P 500 index is 21.5 times the expected 12-month profit, close to the highest level in three years and far above its long-term average of 15.7 times. Sameer Samana, Senior Global Market Strategist at the Investment Research Institute of Wells Fargo, said, "One of the few reasons that bulls can give for these high (valuation) multiples is that profit growth has been consistently high. As prices rise, you really need profit growth, which may be much better than expected
Ryan Detrick, Chief Market Strategist of Carson Group, believes that the bull market is actually still very young. That's right, the two-year bull market in history still has a long way to go. The average bull market since 1950 has lasted for more than five years, with an increase of over 180%, "he said.
At present, the S&P 500 index has been rising for five consecutive months. Detrick found that this has happened 29 times since 1950, and the index has risen 28 times a year later, with a success rate of 97%. Yes, this is just a signal, we would never recommend investing based on a single data point, but in the context of continuing to see all bullish signals, this further strengthens our overall bullish stance, "he added.