The Global Stock Market ended the week up 14.7% year-to-date. So far this year, international stock markets (+24.8%) are outperforming the S&P 500 (+11.5%). Since the bottom of the Trump Tariff Panic in April, the Global Stock Market has rallied 35.6% to new all-time highs.
Many pundits are now citing weakening employment and high valuation as the foundations for a stock market retreat, however, we are more optimistic. This week we will briefly touch on a few reasons that stock markets may continue to provide solid returns over the next few years.
Earnings Growth Expectations
For the last few years, earnings growth has been concentrated in the Mega Cap Technology companies. Despite a strong economy, the bulk of other US based firms haven’t been able to generate above trend earnings growth rates.
Analysts believe that is about to change. FactSet shows that analysts expect the Mega Cap Tech firms to maintain high teens growth rates but they also expect the rest of the market to produce double digit earnings growth as well.
Interest Rate Cuts
As discussed in last week’s note, the Fed is on the cusp of a monetary policy shift that the markets are expecting to reduce interest rates to 3% by the end of next year.
Historically, stocks react positively to rates cuts if the cuts aren’t a reaction to impending recession.
While recession could happen, our base case is that the economy continues to grow for the foreseeable future. This would mean that the positive earnings momentum would get discounted as lower rates leading to higher “fair value” prices.
Hedge Funds Short
Even though stocks have had a huge run since April, speculators are still net short US stocks. If earnings growth continues to accelerate and the Fed begins to cut rates, then it is likely that they will have to adjust their positioning and buy stocks. This could provide an incremental tailwind to stock markets over the near term.
As we said last week, we are generally optimistic on the markets and expect them to continue their volatile rise over the intermediate-term. We are carefully watching for a sign of unexpected inflation or margin compression on corporate earnings statements that might derail this bull market.
