By John Lau
February 2, 2024 – In my January market letter, I wrote “… I want to start 2024 clearly defining what I see to be the five most important assumptions investors are making right now, because it’s how these events occur vs. these assumptions, and not absolute values, that will determine if stocks and other assets rise or fall in Q1 and 2024.” With January being over and us looking ahead now with the Q4/’23 earnings and the Fed’s decision yesterday, I wanted to revisit and update these assumptions so we know where we stand heading into the second month of the year.
Assumption 1: Fed cuts rate six times for 150 basis points of easing and a year-end fed funds rate below 4.0%. Update: The chances of a March rate cut have fallen but markets still fully expect a May rate cut. At the press conference yesterday, Powell did not flat out reject the notion of a March rate cut (he said it was “unlikely”), which pushes expectations for a March rate cut from around 50% yesterday morning to 40% (so not a huge move) and markets still fully expect a May rate cut. The Fed Fund futures still project a 70%-ish probability the Fed Fund rates ends 2024 between 3.50%-4.00%[1].
Assumption 2: No Economic Slowdown. Update: Economic data is beginning to broadly show that the U.S. economy is losing forward momentum but it is still not pointing to a slowdown. Even with the big drop to end January (January 31), the S&P 500 is still trading at just under 20X the $245 expected S&P 500 earnings expectation[2]. A 20X multiple is one that assumes zero economic slowdown (if markets were expecting a mild slowdown, a 17X-18X multiple would be more appropriate).
Assumption 3: Solid Earnings Growth. Update: Mild deterioration but not enough to invalidate the assumption. The Q1 earnings season has been decidedly mixed so far. The 2024 earnings estimates are drifting very slightly lower to $240-$245 but that’s not enough to invalidate this earnings growth assumption. How do we know this is a market assumption? The consensus expectations for 2024 S&P 500 earnings per share remain around $245-ish per share. That’s nearly 10% higher than the currently expected $225 per share earnings for last year (2023), which points to strong annual earnings growth.
Assumption 4: No additional geopolitical turmoil. Update: Mild deterioration but not enough to invalidate the assumption. Geopolitical situations have deteriorated since the start of the year as the U.S. is now actively striking Iranian proxy groups and trade through the Suez Canal has been disrupted. Meanwhile, there’s still no deal on Ukrainian aid and Russia is reportedly gearing up for an offensive in the coming months. But despite that, rising geopolitical risks are not yet high enough to spook stocks. How do we know this is still the market’s assumption? Oil prices. Oil prices have stayed below $80/barrel. If markets were nervous about geopolitics, Brent Crude prices would be solidly higher. Oil prices in the high $80s to low $90s reflect elevated geopolitical concern while prices above $100/bbl reflect real worry.
Assumption 5: No domestic political chaos. Update: Former President Trump will almost certainly win the Republican nomination and have that issue decided within the next few weeks. However, there’s been little-to-no resolution on his various criminal cases and those will unfold over the coming months. Despite this uncertainty and mild deterioration, it hasn’t impacted stocks and broadly markets still assume no negative political influence on stocks. How do we know this is still the market assumption? Treasury yields. The 10-year yield has risen slightly from 3.80%ish at the start of the year to 3.99%[3], but that’s mostly been driven by reduced expectations of a March rate cut. For now, this mild deterioration hasn’t impacted stocks.
Bottom line: For all the noise surrounding the FOMC decision and Powell’s comments yesterday, markets largely exited Wednesday the same way they entered it, with a March rate cut possible, but not certain, and a May rate cut fully expected. So, the Fed wasn’t notably hawkish and as such, the Fed meeting was not a material negative for markets. The market assumptions that pushed stocks higher in Q4 are still broadly in place although three of them have seen deterioration in their respective situations. As such, we’ll need to continue to watch growth, earnings and global and domestic politics because if these assumptions are proven false, stock volatility will increase.
Our clients rely on us for timely information, and our job is to deliver.
Disclosures
Investment advisory services offered through Robertson Stephens Wealth Management, LLC (“Robertson Stephens”), an SEC-registered investment advisor. Registration does not imply any specific level of skill or training and does not constitute an endorsement of the firm by the Commission. This material is for general informational purposes only and should not be construed as investment, tax or legal advice. The information contained herein was compiled from sources believed to be reliable, but Robertson Stephens does not guarantee its accuracy or completeness. Investing entails risks, including possible loss of principal. Past performance does not guarantee future results. This material is an investment advisory publication intended for investment advisory clients and prospective clients only. Robertson Stephens only transacts business in states in which it is properly registered or is excluded or exempted from registration. A copy of Robertson Stephens’ current written disclosure brochure filed with the SEC which discusses, among other things, Robertson Stephens’ business practices, services and fees, is available through the SEC’s website at: www.adviserinfo.sec.gov. © 2024 Robertson Stephens Wealth Management, LLC. All rights reserved. Robertson Stephens is a registered trademark of Robertson Stephens Wealth Management, LLC in the United States and elsewhere.
Securities offered through Fortune Financial Services, Inc. Member FINRA/SIPC. Robertson Stephens Wealth Management, LLC and Fortune Financial Services, Inc. are separate entities and are not affiliated.
[1] Morningstar: When Will the Fed Start Cutting Interest Rates? Authored by Preston Caldwell – January 29, 2024.
[2] FactSet
[3] YCharts
Bullish Assumptions Updated
By John Lau
February 2, 2024 – In my January market letter, I wrote “… I want to start 2024 clearly defining what I see to be the five most important assumptions investors are making right now, because it’s how these events occur vs. these assumptions, and not absolute values, that will determine if stocks and other assets rise or fall in Q1 and 2024.” With January being over and us looking ahead now with the Q4/’23 earnings and the Fed’s decision yesterday, I wanted to revisit and update these assumptions so we know where we stand heading into the second month of the year.
Assumption 1: Fed cuts rate six times for 150 basis points of easing and a year-end fed funds rate below 4.0%. Update: The chances of a March rate cut have fallen but markets still fully expect a May rate cut. At the press conference yesterday, Powell did not flat out reject the notion of a March rate cut (he said it was “unlikely”), which pushes expectations for a March rate cut from around 50% yesterday morning to 40% (so not a huge move) and markets still fully expect a May rate cut. The Fed Fund futures still project a 70%-ish probability the Fed Fund rates ends 2024 between 3.50%-4.00%[1].
Assumption 2: No Economic Slowdown. Update: Economic data is beginning to broadly show that the U.S. economy is losing forward momentum but it is still not pointing to a slowdown. Even with the big drop to end January (January 31), the S&P 500 is still trading at just under 20X the $245 expected S&P 500 earnings expectation[2]. A 20X multiple is one that assumes zero economic slowdown (if markets were expecting a mild slowdown, a 17X-18X multiple would be more appropriate).
Assumption 3: Solid Earnings Growth. Update: Mild deterioration but not enough to invalidate the assumption. The Q1 earnings season has been decidedly mixed so far. The 2024 earnings estimates are drifting very slightly lower to $240-$245 but that’s not enough to invalidate this earnings growth assumption. How do we know this is a market assumption? The consensus expectations for 2024 S&P 500 earnings per share remain around $245-ish per share. That’s nearly 10% higher than the currently expected $225 per share earnings for last year (2023), which points to strong annual earnings growth.
Assumption 4: No additional geopolitical turmoil. Update: Mild deterioration but not enough to invalidate the assumption. Geopolitical situations have deteriorated since the start of the year as the U.S. is now actively striking Iranian proxy groups and trade through the Suez Canal has been disrupted. Meanwhile, there’s still no deal on Ukrainian aid and Russia is reportedly gearing up for an offensive in the coming months. But despite that, rising geopolitical risks are not yet high enough to spook stocks. How do we know this is still the market’s assumption? Oil prices. Oil prices have stayed below $80/barrel. If markets were nervous about geopolitics, Brent Crude prices would be solidly higher. Oil prices in the high $80s to low $90s reflect elevated geopolitical concern while prices above $100/bbl reflect real worry.
Assumption 5: No domestic political chaos. Update: Former President Trump will almost certainly win the Republican nomination and have that issue decided within the next few weeks. However, there’s been little-to-no resolution on his various criminal cases and those will unfold over the coming months. Despite this uncertainty and mild deterioration, it hasn’t impacted stocks and broadly markets still assume no negative political influence on stocks. How do we know this is still the market assumption? Treasury yields. The 10-year yield has risen slightly from 3.80%ish at the start of the year to 3.99%[3], but that’s mostly been driven by reduced expectations of a March rate cut. For now, this mild deterioration hasn’t impacted stocks.
Bottom line: For all the noise surrounding the FOMC decision and Powell’s comments yesterday, markets largely exited Wednesday the same way they entered it, with a March rate cut possible, but not certain, and a May rate cut fully expected. So, the Fed wasn’t notably hawkish and as such, the Fed meeting was not a material negative for markets. The market assumptions that pushed stocks higher in Q4 are still broadly in place although three of them have seen deterioration in their respective situations. As such, we’ll need to continue to watch growth, earnings and global and domestic politics because if these assumptions are proven false, stock volatility will increase.
Our clients rely on us for timely information, and our job is to deliver.
Disclosures
Investment advisory services offered through Robertson Stephens Wealth Management, LLC (“Robertson Stephens”), an SEC-registered investment advisor. Registration does not imply any specific level of skill or training and does not constitute an endorsement of the firm by the Commission. This material is for general informational purposes only and should not be construed as investment, tax or legal advice. The information contained herein was compiled from sources believed to be reliable, but Robertson Stephens does not guarantee its accuracy or completeness. Investing entails risks, including possible loss of principal. Past performance does not guarantee future results. This material is an investment advisory publication intended for investment advisory clients and prospective clients only. Robertson Stephens only transacts business in states in which it is properly registered or is excluded or exempted from registration. A copy of Robertson Stephens’ current written disclosure brochure filed with the SEC which discusses, among other things, Robertson Stephens’ business practices, services and fees, is available through the SEC’s website at: www.adviserinfo.sec.gov. © 2024 Robertson Stephens Wealth Management, LLC. All rights reserved. Robertson Stephens is a registered trademark of Robertson Stephens Wealth Management, LLC in the United States and elsewhere.
Securities offered through Fortune Financial Services, Inc. Member FINRA/SIPC. Robertson Stephens Wealth Management, LLC and Fortune Financial Services, Inc. are separate entities and are not affiliated.
[1] Morningstar: When Will the Fed Start Cutting Interest Rates? Authored by Preston Caldwell – January 29, 2024.
[2] FactSet
[3] YCharts
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