The S&P 500 has soared this year, and the only challenge left for the index is to reach a new record high. Can it do this?
Still, here we consider whether the index can make new highs before January. This may not be as crazy as it sounds. The S&P 500 has surged 16% through the wall of worry so far this year, overcoming hurdles like a mini-banking crisis, higher interest rates and recession fears.
Now the Federal Reserve’s interest-rate hike campaign is almost over, while the economy continues to be in turmoil. If all goes well, earnings will start rising again in 2024, which would justify higher valuations and more profits.
After all, a new S&P 500 high is just 8% away.
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“When could the S&P reach new highs? “I think it will happen sooner than most people expect because no one is prepared for it,” says Thomas Hayes, founder of Great Hill Capital.
Getting there is far from an academic concern. An old peak sits there like a lighthouse, attracting the attention of bulls and bears alike. If the record is broken, it likely confirms that a new bull market is underway, attracting new investors, increasing the confidence of those who are already long, and covering shorts. Are being forced to. But if it’s not violated, the bears will feel adventurous – and everyone else will wonder if they got it wrong.
This is exactly what happened in March 2000, when the S&P 500 rose to 1553, fell 11%, and then rose to 1530 in September, just shy of the March high. This was enough to trigger a subsequent decline of 40%.
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That’s worrying “to a degree,” says Matthew Tuttle, CEO of Tuttle Capital Management.
However, nothing is predetermined. Although there are parallels between now and the dot-com bust, particularly in the artificial-intelligence hype that has become increasingly uncomfortable, this market is still underpinned by something it didn’t have more than two decades ago – earnings.
FactSet shows that S&P 500 total earnings per share are expected to rise about 12% next year to $248 on improving sales and expanding profit margins. Applying a multiple of 19.8 to those earnings – where the S&P 500 traded earlier this year – would put the index at 4910 by the end of the year, 10% higher than Friday’s close and a record high.
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Tim Hayes, chief global investment strategist at Ned Davis Research, confirmed that the earnings backdrop for domestic and overseas stocks is becoming increasingly positive. Perhaps the strongest signal: While 82% of sectors in the MSCI ACWI World Index have positive forward earnings growth, only 27% have positive trailing earnings growth, a difference of 55 percentage points. Hayes says that over the past 20 years, the index has increased by 11% annually when the difference has been more than 50 points, which is much better than the 0.3% increase when it has been less than 50.
“The current phase of the earnings cycle is increasingly weighing on global equities,” he writes.
Until that happens, buying the dips is the way to go.
write to Jacob Sonenshine at [email protected]
Source: www.barrons.com
