So far in 2024, U.S. stocks have had a great election year rally. However, investors aren’t sure if the rally will continue, so they’re keeping an eye on data on inflation and economic growth to guess where the Federal Reserve might set interest rates. They’re also keeping an eye on data on corporate earnings in the second half of this year.
As of now, the S&P 500 SPX is on track for its best first half performance in an election year since 1976. It is also on track for its second-best performance in an election year overall.
That being said, analysts at Ned Davis Research say the rally has “left valuations stretched, sentiment optimistic, and the market overbought.”
Analysts said that the U.S. stock market could go down in the second half of the year because of a number of things, such as estimates for corporate earnings, the lack of clarity around possible Fed rate cuts and the upcoming presidential election in November, and the narrow nature of the market’s rally.
Analysts now expect earnings growth of 12% to 13% for 2024, which is better than what was expected at the beginning of the year. However, Sam Stovall, chief investment strategist at CFRA, said that valuations are rising even faster.
Stovall told MarketWatch that could be a worry. “We need to check to see if the rising stock prices and price-to-earnings ratios are really because the market thinks the company will make more money,” he said. Investors are putting this kind of information on hold for now while they wait for the second quarter earnings season to start, he said.
But investors are even more worried about persistent inflation. This, along with growth data, will affect when and how much the Fed cuts interest rates this year, according to William Northey, investment director at U.S. Bank. The Fed has said that rates will only be lowered once more this year, but the CME FedWatch Tool shows that traders in fed-funds futures are already pricing in two cuts starting in September.
The personal-consumption expenditures (PCE) price index, which comes out on Friday, is the most important piece of data next week when it comes to inflation. The director of wealth management research at D.A. Davidson, James Ragan, thinks that the PCE numbers for May will confirm that inflation is slowing, which was shown by the consumer price index data that came out earlier this month.
Stovall agreed and said that he thinks both the headline and core PCE inflation numbers will be lower than they were last month. This could be good news for the stock market.
At the same time, economic growth data is still very important. Ragan said that the market expects U.S. GDP growth to slow but stay positive. “Weaker data isn’t always bad for the market,” he said, because it could push the Fed to cut rates more quickly. “Some bad news is good news,” they say.
Northey of U.S. Bank said that for the stock market to keep going up, investors will need to see the rally get bigger from both a price and an earnings-contribution point of view. He pointed out that the stock market’s strength so far this year has mostly come from megacap tech companies like Nvidia Corp. NVDA, -6.68%, because their earnings are growing so quickly and people are excited about how AI can be used.
Based on data from FactSet, the S&P 500 has gained 14.6% so far this year. Its information technology sector (XX:SP500.45) has gone up 28.7% and its communication services sector (XX:SP500.50) has gone up 24.8%.
Ragan said, “If the economy has a soft landing and stays positive, we would expect some of the cyclical sectors, like energy, financials, materials, and industrials, to do better.” “Those areas should be closely watched; if they start to do better, that will make the rally last longer.”
The Dow Jones Industrial Average DJIA went up 561.17 points, or 1.5%, to 39,150.33 at the end of last week, according to Dow Jones Market Data. This week, the S&P 500 went up 33.02 points, or 0.6%, to 5,464.62, and the Nasdaq Composite COMP also went up 33.02 points, or 0.6%, to 5,464.62.
Next week, investors will also be looking at new data on consumer confidence on Tuesday, new data on home sales on Wednesday, and new data on initial jobless claims on Thursday.
