Record Highs for Stocks: What Investors Need to Know

In this article we review:  

• Recent events contributing to record highs for the S&P 500® and other major market indexes
• Why the markets now view Fed rate cuts as back on the table for CY 2024
• Why we view prospects of double-digit corporate earnings growth over the next two calendar years as being the most meaningful catalyst for stocks at this time  
• Our belief that the equity markets have likely shifted into a longer-term bull cycle following the full recovery of bear market losses earlier this year

Stocks closed at record highs on May 15, as the S&P eclipsed 5,300 for the first time, continuing to climb a wall of worry that has included a series of uncertainties regarding inflation, Federal Reserve interest rate policy, economic growth, and the upcoming election season. With record highs also having been recently reached for the Dow Jones Industrial Index and Nasdaq Composite as well, we believe the following points are important for investors:

Stocks reacted favorably to the April consumer price index report. Following three consecutive months of higher-than-expected inflation readings, the April consumer price index (CPI), released May 15, displayed year-over-year headline price increases of 3.4% and a core (ex-food and energy) print of 3.6%. These numbers were in line with expectations and exhibited declines from March, thereby comforting markets to some extent that inflation’s longer-term downward trajectory could still be in place.

Fed rate cuts back on the table. Combined with a slowing nonfarm payrolls report for April (U.S. Bureau of Labor Statistics, May 3) and a sub-2% initial estimate on 1Q gross domestic product growth (U.S. Bureau of Economic Analysis, April 25), the April CPI report renewed prospects of Fed rate cuts in CY 2024. It would be our judgment that should core CPI continue toward a lower 3% handle, combined with core personal consumption expenditures inflation potential falling toward the lower 2% range, this could be enough for the Fed to implement a pair of 0.25% federal funds rate reductions in 4Q 2024, which we would view as a potential tailwind for stocks. 

We believe the most meaningful catalyst for stocks is still rising earnings growth. As we approach mid-year, it is likely equity valuations will soon begin to be priced off CY 2025 corporate earnings estimates. Currently, bottoms-up, S&P 500 net operating income estimates for 2025 are now forecasting approximately 14% annualized growth, following about 11% growth in CY 2024 (FactSet Earnings Insight, May 10). It would be our opinion that should these estimates be achieved or exceeded, stocks are likely to experience similar levels of total returns in the year ahead.   

Bear in the rearview mirror. With major stock indexes now at record highs, bear market psychology may be fading into the distance. History infers that stocks can perform quite well for extended time frames following complete recoveries of bear market declines (accomplished by the S&P 500 back on January 18), as was the case following previous bear market recoveries in August 2020, March 2013, and July 1989. With subsequent double-digit price gains since January, the prospect of a lower inflation/interest rate and higher earnings growth environment seems supportive of this past January’s full bear market recovery perhaps being a history rhyming inflection point. 

While we would certainly not be surprised by a short-term pullback given the strength exhibited by equities since the bear market low of October 2022, we believe the odds favoring a longer-term bull cycle are now likely gaining traction. As we begin to look out upon CY 2025, we reiterate our year-end 2024 S&P 500 price target of 5,500.     

Investments are subject to market risk, including the loss of principal. Asset classes or investment strategies described may not be appropriate for all investors.

Past performance does not guarantee future results. Indexes are unmanaged and an investor cannot invest directly in an index. 

Equities are subject to market risk meaning that stock prices in general may decline over short or extended periods of time.

Fixed income investing is subject to credit rate risk, interest rate risk, and inflation risk. Credit risk is the risk that the issuer of a bond won’t meet their payments. Inflation risk is the risk that inflation could outpace a bond’s interest income. Interest rate risk is the risk that fluctuations in interest rates will affect the price of a bond. Investing in floating rate loans may be subject to greater volatility and increased risks.

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