A stock market report card as it approaches a year from the mini-bear market low in October 2022 would likely read: "Good effort, shows perseverance, needs improvement." In broader statistical terms, the S&P 500 has maintained the uptrend that began last October 12 with a close of 3,577 after last week it almost touched, never broke, and then bounced off its rising 200 moving average days near 4200. The index is now 20% above its closing low from last year, which is considered a good 12-month year in the abstract, but puts it at a very low level compared to the early years from other bull markets. .SPX 1Y mountain S&P 500, 1 year As Leuthold Group's Doug Ramsey, who has been skeptical about the rally's staying power, put it: "The rally from last October's low represents the longest hibernation of any bear on the stock market." market history, or a bull that is so weak that it should still be considered a calf." Weakness can be measured by the always cited market inequalities. The equal-weighted S&P 500 is up less than 12% from its low. The median stock in the index is up 3% to 4% over the past 12 months. The small-cap Russell 2000 has plummeted below its 200-day average and is down slightly so far this year. Last week, the mega-cap growth gauge Nasdaq 100 essentially recaptured its relative peak against the equally weighted S&P 500 from summer 2020, at the height of the stay-at-home Covid liquidity rush boom. Understandably, many investors consider this high-level performance profile to be unstable and perhaps not representative of what the "real" market is doing. It's fair, but it's not irrational. Projected earnings growth for top growth stocks has risen sharply in recent months, compared with a slight rebound in the rest of the index. And these companies generate a lot of cash, are financially net beneficiaries of higher returns, and are not tightly tied to every GDP growth feint. At the same time, the rest of the market has become cheaper as the perceived increasing odds of recession and higher capital costs weigh on them. Stephen Suttmeier, technical strategist at Bank of America, finds evidence that such divergences do not bode badly in the short term. He recalled years when the S&P 500 led the Russell 2000 by at least ten percentage points during the third quarter, as is the case this year. All four times since 1979, the S&P 500 and Russell 2000 rose in the fourth quarter. Can stocks live with returns at these levels? It is difficult to consider the internal struggle of the market as something positive in itself. Still, it has run into some strong headwinds that most might have expected would sink the index completely. Since the October 2022 low, the fed funds rate has risen 3.25 percentage points and the 10-year yield has risen from 3.9% to 4.8%, a sharp move all the more jarring for having occurred only in the last two months. There was also a sudden bankruptcy of a regional bank, which threatened a broader credit crisis that has yet to take hold. Against these forces we have a constant trend of decreasing inflation and an anticipated re-expansion of corporate profits that have bottomed out. Not to mention the excitement of AI and new miracle weight loss drugs. Jurrien Timmer, head of global macroeconomics at Fidelity Investments, says: "The stock market has been in limbo for a long time. That can't last forever... what can? It could end with a whimper or a bang." . it could be the long-awaited recession, a final collapse for stocks, and then a typical early-cycle recovery, in which the "worst" stocks (those with cyclical earnings and weak balance sheets) recover faster and the market broadens. "The complaining scenario would be a soft landing with inflation falling below 3%. That could be enough for the Federal Reserve to take its foot off the brakes, as earnings estimates continue to improve, driven by a capital investment boom. led by AI." He notes that with the short-term policy rate now well above core inflation, the Fed has room to "return" some recent rate hikes sometime next year without appearing to panic about the economy. But that scenario is a considerable distance away and several blind turns. For now, the pressing question is whether the real economy and stocks can make peace with yields at current levels. Under the right conditions, a 10-year Treasury bond at 4.8% is palatable. Let us remember that nominal GDP growth is above that level. Friday's strong payrolls report means labor demand is still strong and wage disinflation is intact, even as Wall Street will remain on high alert for signs that consumer fatigue, credit strains and housing pressures will cripple at some point the economy. The market pullback has removed some of the stock's valuation risk. The S&P 500 now stands at 17.7 times 12-month earnings forecasts, according to FactSet, up from nearly 20 at the end of July. It's common to notice that stocks look richer than average on this basis, although it's only over the longer period that valuation drives returns. Five years ago, the index's Forward P/E was 16.8. Annualized total returns for the last five years are 10%. Three years ago, the P/E was 22 and the index has also returned an annualized return of 10% since then. Over the past decade, the annual return was 11.8%; the P/E began that decade below 15 times expected earnings. Earnings Season Begins Earnings season begins this week, and Deutsche Bank notes that economic surprise metrics were positive throughout the third quarter, implying that the standard upside surprise dynamic will be in play. Stocks have generally traded poorly with even better-than-expected numbers in recent quarters, so we'll have to see if the recent weakness in most stocks since mid-summer has lowered the bar enough. The S&P 500's 1.2% rally on Friday showed that the market was able to respond, reassuringly, to widespread oversold conditions and a rise in bearish sentiment, after the 10-year Treasury yield moved lower. test and then retreated from the week's high. The jump broke the index above its small three-week downtrend, although technically it probably won't qualify as more than an oversold reflex bounce unless it decisively returns above 4400, another 2-3% gain from here. It would be textbook, if also a bit trite, if this two-month turbulence turned out to be another routine 8% pullback in the S&P to the 200-day average, culminating in another decent trading bottom just as the seasonal tailwinds arrive. in mid October. Even if a typical late-year rally were to occur, taking the index back to its July high, it's hard to imagine investors confidently emerging from the end-of-cycle psychology that sees ghosts ending the expansion in every corner. The nature of last year's progress surely leaves a lot to prove to the market. However, those who doubt that a benign economic outcome is possible in the coming quarters also face a burden of proof, as does the October 2022 bearish consensus, which foresaw a stagflation trap and declared the Nasdaq seriously hurt.
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The stock marketโs report card one year since the bottom of the 2022 bear market
