The S&P 500’s impressive performance in 2023 and into the beginning of 2024 has fueled both excitement and a healthy dose of speculation. The index fearlessly scaled the “wall of worry,” delivering a gain of approximately 10% in Q1. Factors like the Fed’s policy shift, resilient economic indicators, strong corporate profits, and the boom in AI technology have all contributed to the bullish sentiment. Now, with the S&P 500 reaching new all-time highs, the burning question lingers: can this remarkable run persist, or are we due for a market correction?
While the October 2023 market bottom around 4,100 was an undoubtedly opportune time to buy, the roughly 30% surge in the following five months means increased caution may be warranted in the near term. One of our analysts points out that many stocks have experienced rapid appreciation in a short period, potentially making them ripe for a pullback. This view gains support from technical indicators; the RSI is showing a divergence with the S&P 500’s trajectory, signaling that a period of consolidation or correction could be on the horizon.
However, it’s important to remember that the intermediate and long-term outlook remains positive. The market maintains strong fundamentals, and as one of our analysts emphasizes, the S&P 500 has the potential to end 2024 considerably higher, with a target range of 5,800-6,000 still within reach.
Regarding a potential correction, there are a few scenarios to consider. A base-case scenario could entail a 5% pullback, bringing the S&P 500 back to roughly the 5,000 mark. In a more substantial correction, we could see a drop closer to 10%, landing the index in the 4,700-4,800 range.
Timing these market swings is notoriously difficult, particularly when it comes to pinpointing near-term tops. Therefore, a measured approach involving light hedges might be prudent until critical support levels show signs of weakening. One analyst suggests 5,200 as an initial support level, with the more vital support zone lying between 5,100 and 5,000.
Earnings Season and Key Economic Data Loom
Earnings season, kicking off soon, often creates a positive environment for stocks during bull markets. The next few weeks could reveal crucial financial information from major companies. While some pre-earnings dips are possible, the major bank earnings reports around April 12th are a key milestone. The most anticipated part of the season will likely arrive between the 22nd and 26th of April, when major tech firms announce their results.
This week brings some pivotal economic data points. Monday’s ISM manufacturing data indicated slightly higher-than-expected inflation, though another analyst notes that it also demonstrates unexpected resilience in the economy. Wednesday’s ISM non-manufacturing data, coupled with Fed Chair Powell’s commentary, could further influence market sentiment.
Naturally, all eyes will be on Friday’s critical non-farm payrolls report. A figure within the 100-200K zone would be considered positive, while a number exceeding 300K could prompt a negative reaction as it would potentially delay the anticipated first rate cut.
The Path to Rate Cuts
A first rate cut remains likely, with most analysts placing it within the June or July timeframe. Odds currently favor a July cut, though there is a possibility of action as early as the June FOMC meeting. Even in the most cautious scenario, a rate cut by September seems highly probable.
Valuations: A Reason for Optimism
Despite recent gains, stock valuations remain relatively attractive given the economy’s ongoing strength, improving growth prospects, and the anticipated shift toward easier monetary policy. The S&P 500’s forward 12-month P/E ratio suggests healthy long-term potential. Similarly, tech, small-cap, and mid-cap stocks may still present good relative value.
The Bottom Line
The market’s strong start to 2024 should be appreciated, but a period of pullback or consolidation could be imminent. However, a healthy economy and the imminent shift in Fed policy create a solid foundation for stocks in the longer term. Add in the booming AI sector, with its promise of increased efficiency and profitability, and the case for optimism remains strong. Despite possible near-term volatility, the S&P 500 remains on track for a strong finish in 2024.
