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Growing optimism about the global economy and improving corporate earnings are driving stock markets to record highs and prompting analysts to forecast further gains in what some are calling a “risk reset.”
Wall Street's S&P 500, the tech-dominated Nasdaq Composite, Japan's Nikkei 225, Germany's Dax and France's Cac 40, as well as other indices, have all hit their highest levels ever in recent weeks in hopes that central banks have succeeded is to contain inflation without help and trigger a downturn.
Goldman Sachs and UBS have raised their year-end forecasts for the S&P 500 this year, and Bank of America this month raised its year-end forecast to 5,400 – about 5 percent above the index's current level.
“It’s like a restart of the risk cycle,” said Evan Brown, portfolio manager and head of multi-asset strategy at UBS Asset Management. “Everyone has been expecting a recession for a long time, but it hasn't happened.” He described the growing enthusiasm for stocks as an emergence of pent-up risk appetite.
While stock markets rallied in December on hopes that the Federal Reserve would cut interest rates up to six times this year, the rally continued even though investors had scaled back their expectations to just three or four rate cuts.
Since a painful 10 percent correction between July and October, the S&P 500 has risen more than 24 percent. Wall Street's benchmark index closed slightly in the red on Monday, but has risen in 16 of the last 19 weeks. Europe's Stoxx 600 index rose 0.4 percent on Tuesday, while U.S. futures rose slightly.
Growing hopes that the U.S. and other economies will manage a soft landing this year is a key factor, supported by historically low unemployment rates and robust economic growth, analysts said.
“If you're pricing in rate cuts because everyone is becoming more optimistic about the economy rather than worried about inflation, that's a pretty good mix,” Brown said.
Corporate profits have also supported the rally: Nvidia, maker of artificial intelligence chips, rose nearly 80 percent this year after reporting record profits.
According to JPMorgan's numbers, S&P 500 companies overall beat earnings per share forecasts by 7 percent during the fourth-quarter earnings season, with sectors such as consumer stocks and communications services denting expectations that higher borrowing costs would hurt profits.
Late last year, “every equity strategist in the world said there would be an earnings revision sometime in 2024,” said Manish Kabra, head of U.S. equity strategy at Société Générale. “We are now forecasting first-half earnings growth of 40 percent for the Nasdaq 100 and strong gains in Europe as well.”
The Morgan Stanley team predicted last week that pan-European indices “could continue to rise as they did in 1995,” which would represent an increase of about 12 percent from current levels.
Many analysts believe the current AI-inspired rally is far more grounded than the 1990s tech bubble that led to a crash in 2000.
Back then, “for many companies, profits were pipe dreams rather than reality,” said Liz Ann Sonders, chief investment strategist at Charles Schwab.
“There isn't the broad overvaluation of companies that aren't making money that was the case in the tech bubble,” said Que Nguyen, chief investment officer of equities at Research Affiliates. “Yes, Nvidia is valued at about 70 times earnings. But they actually have income.”
However, prices for Bitcoin, a magnet for speculators, and gold hit new records last week, signaling a potential rebound.
“There was more euphoria around themes than the broader market,” Savita Subramanian, head of U.S. equity strategy at BofA, said of equity market sentiment.
Other analysts have warned that stock valuations are relatively high despite the strong earnings. JPMorgan warned this week of “early signs of rally exhaustion” and a “better than Goldilocks outcome” became the market consensus.
Ian Harnett, co-founder of Absolute Strategy Research, said the rally felt less like “a lot of fundamental investments were being made” and more like “the professional investors we work with have shortened their time horizons.” .
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