No one likes an I told you so

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I was kindly reminded this week that about 6 weeks ago I wrote a piece, with the rhetorical question.“ Why am I bullish? Because it’s too easy to be bearish”. I pointed to a series of reasons why everyone seemed so negative, flattening yield curves, recession fears, valuations of stocks, and leading indicators falling for 17 straight months, to name but a few. Where did I find the reason to be looking for hope? Firstly I expressed the view that bond yields were more likely to fall from where they currently were and this in turn will help support equity markets. Leading indicators may have been falling for 17 straight months but there were signs that the index was stabilising and this remains the case.

Could the US consumer continue to sustain the support of the economy? It appears that it can. There was 2.5 trillion dollars of cash sitting in money market funds earning 5%, but that’s dull when one can own Nvidia or Microsoft. At some point that itch had to be scratched. As we reported earlier this week the recent rally in stocks has been accompanied by strong inflows to equity funds. The threat of a US government shutdown loomed upon us once again, this time as the Speaker of the House was evicted. As is always the case an 11th-hour deal was done to divert any shutdown.

Earnings season was soon to be upon us and expectations were low, so the likelihood of a consensus being met or beaten was high. In the end, 82% of companies in the S&P 500 beat earnings expectations. With almost all of the S&P having reported earnings growth is forecast to be 4.3% for the quarter, it will mark the first quarter of year-over-year earnings growth reported by the index since Q3 2022, according to Factset. Analysts now expect earnings to grow circa 10% in 2024.

At the time of writing the timing was not perfect but the principal was correct. The market continued to fall further as the bears took a tighter grip. A new concern for investors was the fear the 7th of October attacks would lead to an escalation in Middle Eastern tensions, which in turn would drive oil prices higher and add the global economic uncertainty.

Markets however are now higher than they were when we wrote the piece, and sentiment has dramatically improved. The bears are hibernating once again. Yields have fallen as inflation rates keep falling across the globe. Except in Argentina apparently currently running at almost 150% year over year.

We are back at the point the S&P 500 peaked in late March 2022, and late July this year. What pushes it through that peak, is not sure but once again it does go to prove when sentiment runs hot either way, as Buffet says “get cautious”. What it’s hard to get away from at present is everyone welcomes falling prices but as the minutes from the last Fed meeting revealed yesterday, central bankers plan to keep rates where they are for a while yet, at some point that must impact equity valuations, as real yields rise further. That is unless analysts are underestimating how quickly companies can grow earnings.