When the financial indices fluctuate, many analysts and mainstream media outlets immediately reference recent data releases or corporate announcements as the cause. A deeper dive, however, suggests that broader economic conditions often play a significant role. For instance, in 2023, the Nasdaq witnessed an impressive surge, clocking in a 39.76% increase from its initial value of $10,766 (USD) to reach $15,047 by the current assessment. However, a noticeable 2% dip began on July 28, with many attributing it to Fitch's decision to downgrade the US's long-term rating. Yet, as of August 18, this tech-dominant index seems to be steadily regaining its momentum.
The S&P 500's Performance
On a similar note, the S&P 500 also enjoyed an upward trajectory with a growth of 16%, moving from $3,824 to a commendable $4,435 this year. Yet, a slight hitch was observed around July 27, often credited to minutes from the Federal Reserve that indicated losses in bank shares. This downturn lingered until August 18, but current indicators hint at an impending recovery.
Seeking Patterns and Larger Implications
Is it merely by chance that the Nasdaq, an index of 3,300 companies, sees its fortunes rise and fall in tandem with the S&P 500, which lists 500 companies? While financial statements and corporate news may have an impact, more astute traders often look towards broader parameters such as the overall health of a nation's economy or even global financial climates. Consider, for instance, the dynamics of the USD and bond strengths. A noteworthy insight was provided by Barron’s on this matter.
Earnings vs. Bond Yields: Predicting the End of the 2023 Rally
Despite the allure of the stock market's 2023 rally, there are signs that its zenith may be nearing. Doug Peta, the chief U.S. strategist at BCA Research, believes that while interest rates are a factor, the decisive influence may be corporate earnings. He notes that, at the close of the previous year, earnings expectations were subdued. But as 2023 progressed, expectations exceeded these conservative estimates, leading to positive investor sentiments. However, Peta warns that this very optimism could set the stage for future disappointments.
To elucidate, while the beginning of the year saw S&P 500 companies' earnings projections ranging from $190-$195 per share, they've outdone these by approximately 11%, with full-year estimates for 2023 now pegged at around $219. Optimism is already coloring predictions for 2024, with earnings expected to touch $246. However, forecasting earnings with such a long horizon can be tricky. Peta predicts these figures might not meet expectations. He tentatively anticipates a decline of roughly 5% next year, which would peg the S&P 500 earnings per share around $210.
This scenario could place significant pressure on the price/earnings ratio, especially given the rising interest rates. The combination of diminished earnings and a shrinking P/E ratio isn't conducive for bolstering stock prices, particularly as the market enters the traditionally volatile months of September and October. In the upcoming week, all focus will shift to Jackson Hole, Wyoming, the chosen venue for the Fed's annual gathering. This location was initially picked to entice Paul Volcker, the then central bank chief and an avid fly fisherman. Any deviation from Volcker's legendary anti-inflationary stance by the current chief, Powell, would indeed be a surprise.
In conclusion, while data releases and corporate announcements play a role, it's crucial for investors and traders to adopt a more holistic approach, taking into account broader economic forces and trends when making financial decisions.
