Week in the markets: S&P 500 limps to new high

The US stock market hit a new all-time high at the end of last week after more than 100 weeks below the January 2022 peak. Celebrations were muted as the rally remains narrowly focused. Outside the Magnificent 7, the catch-up remains a work in progress. 

Broadening out

Although the market-capitalisation-weighted S&P 500 index closed in uncharted territory at the end of last week, there was a deafening absence of champagne corks. For most stocks, it doesn’t yet feel like a bull market. 

The benchmark index closed at 4,839.8, just clearing the January 2022 high. But it has taken the first three weeks of 2024 to rise the 1.5% required to hit a new peak. Most of the work was done during the remarkable Santa Rally at the end of last year. The mood has darkened somewhat so far this year.  

That’s because investors have reined in their expectations for interest rate cuts this year after an apparent change of heart by the Federal Reserve in December raised hopes for a rapid return to easier money in 2024 and beyond. Since then, signs of resilience in the US economy and a modest uptick in inflation on both sides of the Atlantic has reminded us that the final mile for prices might be the hardest. 

Outside the market’s leaders, too, there’s still a way to go to claw back the losses in 2022. The equal weighted index remains a little below its previous peak and the Russell 2000 small cap index is actually still in bear market territory, just over 20% below its high-water mark. A bull market for the largest stocks at the same time as a bear market for the small caps is extremely unusual. These are anything but normal times for investors. 

The good news is that historically, rallies do broaden out from here. Smaller companies tend to play catch up in due course, and that remains the consensus view among investors. 

What tends to follow a new peak following a bear market or big correction is also a reason to be cheerful moving into 2024. In most cases the market is significantly higher within the next two years. In 1985 after the new high was reached, the following 24 months saw a 50% rise; in 1995 shares rose 60% at their best in the subsequent two years. There are exceptions (notably during the financial crisis) but the balance between good and bad outcomes is firmly skewed towards the positive side. 

All eyes on earnings 

Although interest rates and geopolitics remain key market drivers, ultimately it is the direction of corporate earnings which matters most in the long run. With around a tenth of the US’s biggest companies having already reported their fourth quarter results, the outlook for a continuing recovery in profits looks promising. Nearly nine in ten of those companies have beaten expectations by an average of about 8%. 

That suggests that earnings really did bottom out in the middle of last year. Whether expectations of double-digit growth in earnings this year and next are plausible in the face of a possible mild recession remains open to debate. But forecasts at that level do provide a reasonable cushion for investors, especially with valuations outside the highly rated technology leaders looking far from stretched. 

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