By John Lau
November 4, 2024 – It is not an exaggeration to say that the next two weeks could likely determine if stocks hold (or even extend) the YTD gains or if volatility resurfaces and we have a tumultuous end to what has been, so far, a good year in the markets. This is not hyperbole, because I think each of the major supports of this rally will be tested over the next two weeks; if currently positive market expectations are undermined, then with the S&P 500 still trading above 21X earnings, an air pocket pullback will likely occur.
Test One: Soft Landing. We’ve seen quite a switch in the outlook for the economy over the past two months. In July, a soft landing was all but guaranteed. However, hard landing fears rose (and stocks dropped) in August and September as labor market data disappointed. Then, over the past month, data has rebounded and at this point, a “no landing” possibility is openly discussed. A “no landing” in economics is when the economy continues to grow while inflation doesn’t reach the target set by the central bank. A “no landing” scenario could be driven by strong employment data and consumer spending. In this scenario, the economy could enter a new economic cycle or extend the current one without a recession. Over the next two weeks we will get important economic updates that will either 1) Validate the soft landing thesis (positive for stocks) or 2) Challenge it. Specific data points to watch include the jobs report, ISM Manufacturing PMI and Services PMI (the first two out last Friday, November 1, the Services PMI out this week). For markets to pass this test, economic data needs to remain Goldilocks (so not too hot and imply no landing and less rate cuts, nor too soft and hint at a recession).
Test Two: Earnings. Earnings have been, in many ways, the “unsung hero” of this rally as earnings growth has remained remarkably consistent throughout 2024, allowing the S&P 500 the fundamental justification to rally to current levels. A few of the Magnificent Seven companies reported earnings last week (GOOGL on Tuesday, META and MSFT on Wednesday, and AAPL, AMZN also on Thursday but after market close). For the market to pass this test, we needed to see guidance from these companies remain upbeat and above expectations, underscoring that earnings growth is solid. So far, reports have been mixed: Apple said on a call with analysts that it expects “low to mid-single digit” sales growth during the December quarter, and its services growth to be about the same as its growth rate for the past year. Alphabet on Tuesday reported better-than-expected results, driven by cloud growth; Microsoft issued disappointing guidance on Wednesday, leading to the stock’s steepest sell-off in two years, while Meta beat estimates but warned of significant acceleration in its infrastructure expenses next year[1]. On Thursday, Amazon reported strong growth in its cloud business.
Test Three: Aggressive Fed Rate Cuts. Fed expectations have also shifted wildly in the past few months, as in June just one rate cut was expected, while by August multiple rate cuts were forecast by year-end. The Fed validated those dovish expectations via the 50-bps cut in September and markets proceeded to price in another 75 bps of cuts between then and December. Since then, because of good data and stickier inflation, rate cut expectations have declined to just two 25 bps in November and December and that’s less certain than before. For the market to pass this test, I think Fed rate cut expectations need to stay at two 25 bps cuts in November and December (and not decline below 50 bps of additional easing).
Test Four: Political Calm. Markets have been amazingly resilient in the face of geopolitical upheaval (two ongoing major wars) and throughout this election season, but that will be tested on November 5th. Depending on when the outcome is known and the make-up of the government post-election, markets may be forced to face (and account for) looming fiscal challenges, budget battles, elevated trade tensions or similar issues. Meanwhile, the transition of power in the U.S. may embolden global adversaries and potentially intensify global conflicts. For the market to pass this test, we need to have political clarity out of the election and have the geopolitical situations (wars) not spread or intensify.
The bottom line here is the market has been incredibly resilient this year, but that resilience will be tested in a big way over the next two weeks. We will be here, committed to helping you cut through the noise and stay focused on the core drivers of this market, which remain to be growth, Fed rate cuts, and earnings. Ultimately, they will determine whether this market extends this rally into year-end or if we see an uptick in volatility that makes the final two months of 2024 more difficult than the first 10. We’ve got your back.
[1] CNBC Tech Kif Leswing 10/31/2024
Please do not hesitate to contact us with any questions, comments, or to schedule a portfolio review.
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. It does not constitute a recommendation or offer to buy or sell any security, has not been tailored to the needs of any specific investor, and should not provide the basis for any investment decision. Please consult with your Advisor prior to making any investment decisions. The information contained herein was compiled from sources believed to be reliable, but Robertson Stephens does not guarantee its accuracy or completeness. Information, views and opinions are current as of the date of this presentation, are based on the information available at the time, and are subject to change based on market and other conditions. Robertson Stephens assumes no duty to update this information. Unless otherwise noted, any individual opinions presented are those of the author and not necessarily those of Robertson Stephens. Performance may be compared to several indices. Indices are unmanaged and reflect the reinvestment of all income or dividends but do not reflect the deduction of any fees or expenses which would reduce returns. A complete list of Robertson Stephens Investment Office recommendations over the previous 12 months is available upon request. Past performance does not guarantee future results. Forward-looking performance objectives, targets or estimates are not guaranteed and may not be achieved. Investing entails risks, including possible loss of principal. Alternative investments are speculative and involve substantial risks including significant loss of principal, high illiquidity, long time horizons, uneven growth rates, high fees, onerous tax consequences, limited transparency and limited regulation. Alternative investments are not suitable for all investors and are only available to qualified investors. Please refer to the private placement memorandum for a complete listing and description of terms and risks. 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.
For information about Robertson Stephens, go to www.rscapital.com.
Why The Next Two Weeks Are So Important…
By John Lau
November 4, 2024 – It is not an exaggeration to say that the next two weeks could likely determine if stocks hold (or even extend) the YTD gains or if volatility resurfaces and we have a tumultuous end to what has been, so far, a good year in the markets. This is not hyperbole, because I think each of the major supports of this rally will be tested over the next two weeks; if currently positive market expectations are undermined, then with the S&P 500 still trading above 21X earnings, an air pocket pullback will likely occur.
Test One: Soft Landing. We’ve seen quite a switch in the outlook for the economy over the past two months. In July, a soft landing was all but guaranteed. However, hard landing fears rose (and stocks dropped) in August and September as labor market data disappointed. Then, over the past month, data has rebounded and at this point, a “no landing” possibility is openly discussed. A “no landing” in economics is when the economy continues to grow while inflation doesn’t reach the target set by the central bank. A “no landing” scenario could be driven by strong employment data and consumer spending. In this scenario, the economy could enter a new economic cycle or extend the current one without a recession. Over the next two weeks we will get important economic updates that will either 1) Validate the soft landing thesis (positive for stocks) or 2) Challenge it. Specific data points to watch include the jobs report, ISM Manufacturing PMI and Services PMI (the first two out last Friday, November 1, the Services PMI out this week). For markets to pass this test, economic data needs to remain Goldilocks (so not too hot and imply no landing and less rate cuts, nor too soft and hint at a recession).
Test Two: Earnings. Earnings have been, in many ways, the “unsung hero” of this rally as earnings growth has remained remarkably consistent throughout 2024, allowing the S&P 500 the fundamental justification to rally to current levels. A few of the Magnificent Seven companies reported earnings last week (GOOGL on Tuesday, META and MSFT on Wednesday, and AAPL, AMZN also on Thursday but after market close). For the market to pass this test, we needed to see guidance from these companies remain upbeat and above expectations, underscoring that earnings growth is solid. So far, reports have been mixed: Apple said on a call with analysts that it expects “low to mid-single digit” sales growth during the December quarter, and its services growth to be about the same as its growth rate for the past year. Alphabet on Tuesday reported better-than-expected results, driven by cloud growth; Microsoft issued disappointing guidance on Wednesday, leading to the stock’s steepest sell-off in two years, while Meta beat estimates but warned of significant acceleration in its infrastructure expenses next year[1]. On Thursday, Amazon reported strong growth in its cloud business.
Test Three: Aggressive Fed Rate Cuts. Fed expectations have also shifted wildly in the past few months, as in June just one rate cut was expected, while by August multiple rate cuts were forecast by year-end. The Fed validated those dovish expectations via the 50-bps cut in September and markets proceeded to price in another 75 bps of cuts between then and December. Since then, because of good data and stickier inflation, rate cut expectations have declined to just two 25 bps in November and December and that’s less certain than before. For the market to pass this test, I think Fed rate cut expectations need to stay at two 25 bps cuts in November and December (and not decline below 50 bps of additional easing).
Test Four: Political Calm. Markets have been amazingly resilient in the face of geopolitical upheaval (two ongoing major wars) and throughout this election season, but that will be tested on November 5th. Depending on when the outcome is known and the make-up of the government post-election, markets may be forced to face (and account for) looming fiscal challenges, budget battles, elevated trade tensions or similar issues. Meanwhile, the transition of power in the U.S. may embolden global adversaries and potentially intensify global conflicts. For the market to pass this test, we need to have political clarity out of the election and have the geopolitical situations (wars) not spread or intensify.
The bottom line here is the market has been incredibly resilient this year, but that resilience will be tested in a big way over the next two weeks. We will be here, committed to helping you cut through the noise and stay focused on the core drivers of this market, which remain to be growth, Fed rate cuts, and earnings. Ultimately, they will determine whether this market extends this rally into year-end or if we see an uptick in volatility that makes the final two months of 2024 more difficult than the first 10. We’ve got your back.
[1] CNBC Tech Kif Leswing 10/31/2024
Please do not hesitate to contact us with any questions, comments, or to schedule a portfolio review.
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. It does not constitute a recommendation or offer to buy or sell any security, has not been tailored to the needs of any specific investor, and should not provide the basis for any investment decision. Please consult with your Advisor prior to making any investment decisions. The information contained herein was compiled from sources believed to be reliable, but Robertson Stephens does not guarantee its accuracy or completeness. Information, views and opinions are current as of the date of this presentation, are based on the information available at the time, and are subject to change based on market and other conditions. Robertson Stephens assumes no duty to update this information. Unless otherwise noted, any individual opinions presented are those of the author and not necessarily those of Robertson Stephens. Performance may be compared to several indices. Indices are unmanaged and reflect the reinvestment of all income or dividends but do not reflect the deduction of any fees or expenses which would reduce returns. A complete list of Robertson Stephens Investment Office recommendations over the previous 12 months is available upon request. Past performance does not guarantee future results. Forward-looking performance objectives, targets or estimates are not guaranteed and may not be achieved. Investing entails risks, including possible loss of principal. Alternative investments are speculative and involve substantial risks including significant loss of principal, high illiquidity, long time horizons, uneven growth rates, high fees, onerous tax consequences, limited transparency and limited regulation. Alternative investments are not suitable for all investors and are only available to qualified investors. Please refer to the private placement memorandum for a complete listing and description of terms and risks. 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.
For information about Robertson Stephens, go to www.rscapital.com.
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