The rally that just won't quit
Despite a big earnings warning from FedEx and weak results from General Mills. stocks held up well Wednesday. The soft landing hopes and dreams are alive and well. But can the market's bull run last?
FedEx is an economic bellwether. So you’d think that the shipping giant’s weaker-than-expected earnings and uninspiring outlook would take some air out of this heated December stock market rally. Nope.
Sure, shares of FedEx tumbled 10% Wednesday. But the broader market held up just fine. The S&P 500 and Nasdaq were both sporting slight gains. The Dow industrials were flat. Even the Dow Jones Transportation Average, of which FedEx is a component, was only down slightly. These four indexes are up about 5% to 9% this month. And then there’s the small cap laden Russell 2000. It has surged 13% in December.
What gives? Investors continue to believe that the Federal Reserve is going to engineer a so-called soft landing for the economy and possibly even begin to cut interest rates as soon as next spring. Is the market right? It’s too soon to tell. But the 2023 rally should give traders pause. It’s going to be hard to duplicate this year’s bull run.
The S&P 500, for example, is now up nearly 25% this year. The Nasdaq has soared almost 45%. Investors are giddy. The CNN Business Fear & Greed Index (which I helped create) is now showing signs of Extreme Greed.
What happens though if inflation rears its ugly head again? Given how strong the job market remains, with wages continuing to rise at a healthy clip, rate cuts are not necessarily a given. Even if the Fed does start to lower rates in 2024, the central bank may wait longer than the market is expecting and not ease as much. That could put downward pressure on stocks.
Meanwhile, some companies are starting to show signs that inflation is taking a big toll on profits. FedEx isn’t the only one. Cereal and pet food giant General Mills cut its sales forecast Wednesday. RV maker Winnebago reported earnings that missed estimates as revenue fell nearly 20%.
Mutual fund giant Vanguard said in its market outlook for next year that “the prospect that the higher interest rate environment will last for years remains underappreciated.” Vanguard thinks that earnings growth will slow and that profit margins will fall. That’s not good for stocks.
Investors need to realize that the Fed can only do so much and that interest rates are only part of the equation for stock market returns. Earnings matter too. If more and more companies start warning about their 2024 outlooks, this December rally could turn into a January pullback.
Comerica Wealth Management chief investment officer John Lynch noted in a report that his firm expects “the U.S. economy to inch along in the first half of 2024 as the lagged effects of monetary tightening restrain output.” Lynch added that “interest rates will likely remain elevated” and that there is “little-to-no room” for valuations to expand. Lynch said Comerica has a below consensus forecast for corporate profit growth too. As such, Comerica’s fair value target range for the S&P 500 is 4,750 by the end of 2024. That is below where the blue chips are currently trading.
So 2024 may not necessarily be a bear market type of year. But it looks like the easy money days of 2023 aren’t going to continue over the next 12 months,