The S&P 500 is rising once again after optimistic news on inflation and interest rates, although some top strategists believe the rally will soon be derailed.
U.S. stocks soared on that news. The growth-focused Nasdaq Composite hit another record, as did the S&P 500, which is now up 14% in 2024 after a 24.2% rise last year.
Watch out for the next fix.
But instead of popping the champagne, several market experts fear a reduction.
Adam Phillips, chief investment officer at EP Wealth Advisors, said in an interview that U.S. stocks are weaker than they appear. A handful of mega-cap growth stocks are generating most of the S&P 500's gains, he noted, and that narrow market breadth is masking deficiencies in dozens of smaller companies. If those leaders retreat, investors could receive a jarring wake-up call.
"Just in the last month, we've seen the S&P 500 rise about 3%, but more than 60% of that return has come from Nvidia," Phillips said earlier this week. "And if you look at the equal-weighted S&P 500, it has actually produced a negative return over the last month. That's why I think it's really important to look under the hood for signs of market health. "It tells us that the market is not, potentially, as healthy as it might seem.
Until a broader set of stocks do better, Phillips believes skepticism about this rally is warranted. Companies can catch up to the tech giants by posting outstanding earnings, but they won't have the chance to do so before the second-quarter earnings season begins in mid-July.
Meanwhile, Phillips is concerned about investor enthusiasm despite a dearth of major market drivers and mixed economic data.
The idea of โโsofter economic growth worries Anthony Saglimbene, chief market strategist at Ameriprise Financial. The slowdown in inflation is encouraging, although it's also reasonable to draw a glass-half-empty conclusion from May's price growth data: the U.S. economy is not warming.
"If we have an economy that looks like it's slowing more aggressively, which may suggest that the Fed is a little off its game or perhaps not paying attention to slowing growth trends, then I think we could see another correction." 5% or 10%". Saglimbene said in a recent interview.
Higher interest rates for longer are reducing inflation, but they are also hurting the economy, Saglimbene said. That's why rate cuts can't come soon enough.
"We are simply heaping more pain on the economy the longer rates remain at these levels," Saglimbene said. So when looking at backward-looking data like employment or inflation, I think it's going to require a much more nuanced response from the Fed, something like What is the ECB doing at the moment? manage growth when interest rates are at these high levels."
However, in Saglimbene's opinion, investors should not worry about the next pullback.
The next drop will likely be modest as those who missed out on this rally will likely take the opportunity to enter the market. And there is a lot of dry powder on the sidelines, Saglimbene noted, while the $6 trillion in money market accounts is double the long-term average.
Whether investors should jump into stocks in light of mixed economic data, high rates and inflated valuations is another story.
Gene Goldman, chief investment officer at Cetera Investment Management, noted that the S&P 500 is trading at a future earnings multiple of 21xwhich is ambitious in this context.
"High valuations: you need low interest rates, you need low inflation, and we don't have either right now," Goldman said in a recent interview. "So you're valuing absolute perfection."
Like Phillips, Goldman noted that growth stocks with sky-high expectations are supporting market returns and valuation, although they often perform poorly in election years. Unless mega-cap stocks continue to defy gravity, expect a sizable pullback this summer.
Any market correction would likely be short-lived, Goldman said. He said the S&P 500 could pull back to its 200-day moving average, which is just above 4,800. An 11.5% drop wouldn't be fun, but the investment chief noted it would be smaller than the average 14.2% drop.
The bull case for continued gains
However, some strategists Business Insider spoke to recently dismissed the idea that investors should be careful.
Shep Perkins, chief investment officer at Putnam Investments, expects U.S. stocks to gradually rise in what has been called the "wall of worry" as many investors are still skeptical of this rally. Most importantly, earnings growth has resumed, which should support higher earnings.
"The S&P 500's gains - after a period of stagnation over the last year - have begun to reaccelerate," Perkins said. "And that's usually a good ingredient for stocks to go up."
Garrett Melson, portfolio strategist at Natixis Investment Managers, said the S&P 500 could add another 10% to its year-to-date gain as investors who have been light on stocks admit defeat.
"I think FOMO comes into play again here," Melson said. "But from a fundamental and technical perspective, I still think the trend is for prices to continue rising."
10 ways to invest despite drawdown risk
Even those who are bracing for a pullback have parts of the market they are bullish on.
Saglimbene maintains its decision on overweight US stocks due to the country's strong growth, despite the risk of a short-term setback. large capital letters They are more attractive than small and medium-sized stocks as long as interest rates remain high, he added.
Regarding the sectors, Saglimbene is optimistic regarding companies in the consumer staples sector as the group has defensive attributes and pricing power, and is also selectively bullish on technology shares since they have registered notable growth.
Both Saglimbene and Goldman highlighted the stocks in Europe and Japan, which have performed admirably this year and should hold up if U.S. stocks falter. Goldman also highlighted value-oriented stocks and lowercase lettersas both have relatively attractive valuations.
Phillips is more bullish on stocks in less flashy sectors like energy and industrial stocks. Energy companies generate tons of free cash flow and net income, plus they are a hedge against risks like inflation and geopolitical issues. The latter also applies to defense companies within the industrial sector. Industrialists are also the main beneficiaries of increased infrastructure spending, he said.
