The stock market has been shaky lately. Any single factor selected could lead to a significant decline.
The
S&P 500,
At just over 4700, the index was unable to recapture its record closing high of 4796, which it first reached in early January 2022. After rising near this peak three times in the last month, sellers came in each time to push the index lower. It is now down almost 1% at the start of the new year.
The market may need a real “catalyst” or event to bring it significantly lower. Last week it fell slightly below the 4700 level a few times, but buyers came in and took a dip to send the price back up. Still, the market is clearly struggling to sustain the rally.
This isn't surprising considering it's already pretty expensive; The S&P 500 trades at 19 times the aggregate expected earnings per share that analysts expect for the next 12 months, about the highest multiple it has reached since the Federal Reserve began raising interest rates in early 2022 to support economic demand to throttle. Higher interest rates make stocks less valuable and the index is not seeing overwhelming buying interest at its current elevated valuation levels.
Now some lurking catalysts could push the market lower.
Advertisement – Scroll to continue
A disappointing earnings forecast is a risk. The strength of the sales is concerning because demand for goods and services tends to decline with a lag as interest rates rise, and the economy has maintained strong growth in recent quarters. Since growth can only moderate from here, companies are likely to provide conservative guidance, especially if they see revenue trends slowing in the final weeks of the fourth quarter. These quarterly reports begin on Friday with releases from Wells Fargo
,
JPMorgan Chase & Co
.
and Bank of America
.
“Issuing disappointing full-year 2024 guidance will likely remain a net negative catalyst in the near term,” wrote Chris Harvey, chief U.S. equity strategist at Wells Fargo.
Accordingly, some areas of the economy are already showing some cracks, meaning earnings forecasts may need to be lowered. The Institute for Supply Management's manufacturing purchasing managers' index, a broad measure of manufacturing activity, was last at just under 50. That's down from around 55 just before the Fed began raising interest rates. Bank of America says its recent level is likely to be in line with the S&P 500's earnings per share this year, which is about 10% below the current overall forecast from analysts covering the companies in the index.
Advertisement – Scroll to continue
The other factor that could weigh on stocks would be that the market doesn't see the number of rate cuts from the Fed that it currently expects. The federal funds futures market is expecting a handful of cuts later this year, according to CME Group. Those expectations, which began to build last year as inflation fell, sent the S&P 500 rising by double digits in 2023. A reversal in these expectations would likely drive the stock market lower, and there's a good chance markets will cut their rate. We've lowered expectations because inflation is still slightly above the Fed's 2 percent target.
This is not the right time to buy in the stock market. Wait for a drop.
Write to Jacob Sonenshine at [email protected]
Comments are closed.