Indiana Trust Wealth Management
Investment Advisory Services

by Clayton T. Bill, CFA
Vice President, Director of Investment Advisory Services

  • The U.S. equity market, represented by the S&P 500 index, rose 1.4% this week.
  • The US stock market has been strong to open 2024, hitting multiple all-time highs. What are some risks to the equity market in the near-term?

As the US stock market has notched multiple all-time highs over the last two weeks, it may be worthwhile to take a step back and consider what the near-term risks could be for equities:

  • Valuations: the price-to-earnings (P/E) ratio for the S&P 500 market is above its 30-year average and is rising. Stocks are starting to look a touch expensive, especially those top seven names such as NVDIA and Amazon. Surprisingly, however, the overall market’s P/E now is 8% cheaper than it was at the prior peak on January 3, 2022.  Forward earnings growth estimates for 2024 are 10%, and 75% of the names in the S&P 500 still trade at a discount to their January 2022 levels, per UBS’s Jonathan Golub. Also, valuations are notoriously awful at predicting short-term stock market returns.
  • Geopolitical (or political) events: This risk is always present, there is no escaping “external” risks to the stock market. Historically, the S&P 500 has shown an insouciant attitude toward nasty geopolitical events, frequently climbing in the face of dire news.
  • The Fed’s Quantitative Tightening program: The Federal Reserve is shrinking its US Treasury holdings thus draining bank reserves, a program known as “Quantitative Tightening” or “QT”. Some claim that this will create portfolio flows away from stocks towards US government bonds, sending stock prices lower, all recent performance and evidence to the contrary.
  • Historically, February is a bad month for stocks: This is true, but why should the calendar flip from January to February matter for stock market prices?
  • The Fed’s interest rate hikes finally drive the economy into recession: Monetary policy doesn’t seem to be very restrictive lately, as unemployment remains low, job creation remains robust, the economy is growing, and stocks are reaching new heights. Perhaps the economy is structurally able to withstand the current interest rate regime.
  • Inflation is rekindled: The US economy was accelerating in the 4th quarter of 2023, and the Atlanta Fed’s GDPNow growth forecast for the 1st quarter of 2024 as of Thursday was 4.2%. At the same time, wages are cooling, inflation is falling, and productivity is rising.

These are good macroeconomic times, but perhaps the underappreciated risk for 2024 is that the economy is too good, productivity falls, and inflation rears its head once again. That would prompt the Fed Chairman, Jerome Powell, and his brethren at the Fed to revisit more interest rate hikes.

This is an outcome that is not even close to consensus, for good reason: inflation really is decelerating. The widely shared view is that the Fed will cut interest rates later this year. That said, as 2022 showed, the Fed is not going to be afraid to act with rate hikes – even in an election year – should the data support it.


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