Control Panel: SPX > 5,000

Tech Rally Lifts S&P 500 Above 5,000 Mark

By J. Edward Moreno and Joe Rennison, The New York Times, Feb. 9, 2024

The News

Stocks rose on Friday, with the S&P 500 index closing above 5,000 for the first time amid a rally fueled by better-than-expected earnings reports…

The rally in the stock market has come with inflation cooling, corporate profits growing and lower borrowing costs on the horizon… Nearly 70 percent of the companies in the S&P 500 had reported earnings as of Friday, with three-quarters of those reports better than expected…

Jerome H. Powell, chair of the Federal Reserve, said on Sunday that policymakers needed to see more evidence that inflation was under control before it moved to cut rates. Investors now predict that the Fed will cut rates in May instead of March… [End Quote]

Stocks Are at Records, but Are They Expensive? These Models Have an Answer

What investors can learn from five popular valuation models


Hardika Singh, The Wall Street Journal, Feb. 11, 2024

Price/earnings ratio … Based on trailing earnings, the S&P 500’s multiple is 24.18, above its 10-year average of 20.36. The index’s forward multiple, at 20.38, recently rose above 20 for the first time in two years. Its longer-term average is 17.96… “From a risk-reward perspective, U.S. equities in particular are pretty unattractive. They have a lot of momentum, but they are expensive.” …
Price-to-book ratio… The S&P 500 is trading at a forward price-to-book ratio of 4.15, above its 10-year average of 3.26 and its 20-year average of 2.76…

Equity risk premium… This method measures the reward for owning stocks over government bonds, calculated by taking the gap between a company’s earnings yield and that of a Treasury… Comparing the trailing earnings yield with the 10-year Treasury yield shows that the S&P 500’s equity risk premium is at 0.7 percentage point, near the lowest level in about two decades. …

Price/earnings growth ratio… divide a company’s price/earnings ratio over the past 12 months by its projected annual future earnings growth. … The S&P 500’s current PEG ratio is 1.48, below its 10-year average of 1.49 and above its 20-year average of 1.35…

CAPE ratio … calculated by dividing a stock’s current price with its average inflation-adjusted earnings from the previous 10 years… At 33.4, the S&P 500’s CAPE ratio is higher than it has been more than 96% of the time since 1881… [end quote]

The CAPE is only slightly lower than the October 2021 peak, higher than the 1929 peak and still in a bubble.

The stock market is in a strong bull run. The NASDAQ index, driven by tech stocks, is in a blow-off exponential growth curve. The trade is strongly risk-on, as the SPX and junk bonds are rising faster than the 10 Year Treasury. The Fear & Greed Index is in Extreme Greed.

VIX is low. So is financial stress. There is no immediate dark cloud of crisis. The markets are aware of long-term risk from commercial real estate and the refinancing of low-interest debt by zombie companies but that isn’t impacting the short-term market.

After Fed Chair Powell’s speech the bond markets finally began to accept that the Fed will not cut the fed funds rate as rapidly as they had hoped. The markets have seen this cycle of over-optimism followed by retrenchment at least 3 times since 2020. The options market doesn’t expect a fed funds rate cut until May 2024.

The Treasury yield curve rose last week. It’s now positive between 5 and 20 years.

Corporate BBB yields and spreads have dropped, showing confidence in the economy and that inflation will stay under control. Investors aren’t being paid much for the additional risk of lending money to weak investment-grade companies. Junk bond spreads are slightly lower than in 2019.

After a rise in 2023, gold appears to have settled in a channel above $2,000 per ounce. The USD is oscillating in a channel established in early 2023. Oil appears to have stabilized at the top of its 2023 channel. Natgas is plunging.

The Atlanta Fed’s GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the first quarter of 2024 was 3.4 percent on February 8. This continues the strong growth of late 2023. This is better than just a soft landing. There’s no hint of recession here. The Smoothed U.S. Recession Probabilities calculated by the Fed is negligible. This is based on four monthly coincident variables: non-farm payroll employment, the index of industrial production, real personal income excluding transfer payments, and real manufacturing and trade sales.

However, the Conference Board’s Index of Leading Economic Indicators is still deeply negative as it has been since 2022. As the magnitude of monthly declines has lessened, the LEI’s six-month and twelve-month growth rates have turned upward but remain negative, continuing to signal the risk of recession ahead. Overall, they expect GDP growth to turn negative in Q2 and Q3 of 2024 but begin to recover late in the year.

It’s clear that the stock market is overvalued and in a risky bubble. However, there’s no telling when or how the bubble will burst.

The METAR for next week is sunny.