As the market is seeing a consolidation phase following a strong surge, the question in the minds of investors is whether the rally has stalled. President and Chief Investment Strategist of Yardeni Research Ed Yardeni offered a sober near-term outlook and a bullish prediction for the year-end.
Whither Goes Market? “Our hunch is that the stock market will continue to churn around current levels, rotating and remaining below its July 16 record high of 5667.20 through the presidential election,” said Yardeni in the firm’s weekly market update on Sunday, co-authored with Eric Wallerstein. “We expect a strong yearend rally to deliver a new record high,” they said.
The market has ignored the geopolitical tension stirred up on Saturday when a rocket strike from Lebanon killed 12 people in Israel’s Golan Heights and the retaliation by Israel, the strategists said. Instead, the stock market is laser-focused on the “upturn in earnings since early 2023, stretched valuations, and a rotation out of mega-cap stocks to large-caps and SMID-caps amid expectations that the Fed will cut rates in September, they added.
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Earnings Cheer: The strategists delved into the positive earnings catalyst, as they noted that consensus 2024, 2025 and 2026 earnings expectations for the companies constituting the S&P 500 Index rose in the latest week. Therefore, the forward earnings rose to yet another new high in the week of July 25, they said.
The S&P 500’s forward P/E multiple is at an elevated 20.6, inflated by the 30 times multiple for the mega-cap-8 stocks – the Magnificent Seven + Netflix, Inc. NFLX, Yardeni and Wallerstein said. Excluding these eight, the other 492 stocks in S&P are trading at a more modest 18.5 times multiple, they said.
The strategists noted that S&P smid-caps have seen their earnings for a couple of years flatline and about 40% of the Russell 2000 names were losing money currently.
“Put simply with the levels of bullishness the sentiment indicators got to about a week ago it’s tough to be anything but cautious on the stock market,” said Joe Feshbach, a market consultant for Yardeni Research.
“Couple this with the parabolic look in tech stocks and the market should be in for tough sledding for a while.”
Why It’s Important: The stock market has been on an extended run since the start of 2023, with the rally fueled primarily by mega-cap stocks as the artificial intelligence revolution took a firm hold. Given the overbought levels, the onus of sustaining the rally lies with the smid-cap stocks that have been left behind in the recent rally. This in turn will hinge on the Federal Reserve relenting.
The Federal Open Market Committee, the policy-setting arm of the central bank, is scheduled to hold a two-day meeting beginning on Tuesday. The futures market is pricing in only a 4% probability of a rate cut at the July meeting but a 100% probability of a September cut, with the highest probability (about 86%) accorded to a quarter-point cut.
This could serve to energize the rally going into the seasonally strong year-end period when the market benefits from a host of factors including year-end window-dressing by funds, investment of holiday bonuses and general holiday cheer. This time around the market move might also be influenced by the outcome of the general election.
The Street-high year-end target for the S&P 500 Index is 6,000, which suggests roughly 10% upside from the current levels.
The SPDR S&P 500 ETF Trust SPY, which tracks the S&P 500 Index, ended Friday’s session at 544.44, up 1.12%, according to Benzinga Pro data. The exchange-traded fund has gained over 15% for the year-to-date period.
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