The debate about how far the Wall Street rally can go has entered a new dimension. Although few doubt the magnitude of this year’s increases, more and more analysts are now joining a new theory: we are on the threshold of a new era of low yields and what is experienced in the market today will be the final fireworks. The last to mention this option was Goldman Sachs, the North American bank has said that it hopes that in the next decade the profitability of the S&P 500 slows to an average of 3%. This would represent a sharp decline in profitability from the 13% annualized rate of the last decade or the 11% recorded since the Second World War.
“Investors should be prepared for stock returns over the next decade that are in eThe lower end of your typical performance distribution” David Kostin wrote in his latest client report published on Monday. In addition, Goldman’s star strategist has opened the door to a historic turnaround, a 72% probability that the main New York Stock Exchange index will trade for behind the Treasury bond market.
These new forecasts, without great explanations to support this turn, coincide with a moment of relative happiness on Wall Street. The S&P 500 has appreciated 23.65% this year after having risen 26% in 2023. With 2022 being a bad year, the main US index has experienced a situation of euphoria thanks to some technological ‘on fire’ due to the artificial intelligence feverfollowed by a boost from the smallest thanks to the prospects of interest rate cuts and good macroeconomic data that anticipate a soft landing.
The Federal Reserve has begun cutting interest rates this September, with a cut of 50 basis points, now everyone assumes that the institution will undertake another 25 basis point cut at its meeting in November. The swap markets (OIS, for the acronym for Overnight Indexed Swap) give practically done another in December and another in January 2025. In June they estimate that, practically with a cut per meeting, the Fed will have brought the price of money to the range of 3.5-3.75%, that is, a 125 basis point decrease in that period.
These interest rates that are spurring the market are mixed with good dynamics in the economy. Despite the latest slight rise in the core (up to 3.3%), inflation is already at 2.5%, close to the target. The GDP, for its part, remains truly resilient at 3% in the last quarter and the latest monthly employment data for September showed a powerful figure of job creation (252,000 new jobs) that completely removed fears of a rapid and worrying cooling in the labor market. All this has led firms such as S&P Global to bet on a US economy growing at 2.7% in 2024 and 1.8% by 2025. Strong prospects that are supporting the prospects of the most optimistic in equities.
“Growth plus inflation is higher than the market initially anticipated”
“The US economy continues to grow. The growth of the Gross Domestic Product (GDP) in the second quarter, of 3%, almost doubled the growth rate of the first quarter. The first estimate of GDP for the third quarter is published at the end of October, but most of the signs are positive,” they comment from US Bank. “If we look at the strength of the economic data, it tells us that growth plus inflation is higher than what the market initially anticipated,” the entity says in its latest report. “It indicates that the Federal Reserve was successful and can reduce the federal funds rate and, at the same time, generate a better scenario for future economic growth.”
However, without knowing the reasons why Goldman Sachs believes that this recent love affair with equities will be broken and there will even be a very significant slowdown compared to historical figures, JP Morgan explained a few weeks ago that it had the same feeling . The bank published a report in which it stated that the profitability of the next decade of the S&P 500 will fall to 5.7%. That’s slightly better than Goldman’s outlook, but it’s well behind the average since World War II.
A decade lost to an inflated S&P 500
In this case, the North American bank did offer several arguments to justify this trend. The first and most important is that they see a market that is overloaded and, perhaps, inflated with respect to its real figures. The average of recent years with respect to the PER (price-earnings ratio) is 19 times, currently this is close to 26.5. “Current stock market valuations are high relative to history, largely due to the performance of a handful of mega-cap stocks like members of the Magnificent Seven.”
Despite the suffering of some of its members, such as Tesla, the magnificent seven continue to have a great performance, something that could pay off in the index in the future, since they already represent 35% of the S&P 500. So far their advances largely explain measure the great ratings of the selective. The Magnificent Seven ETF, which includes their joint valuation shows an increase of 45% this year and 6% since September began.
With all its volatility, Nvidia appreciated 186% in the year, remaining one of the great drivers of all of Wall Street, given its enormous size of 3.39 trillion dollars. Meta has been the second in contention, advancing 66%. Already far behind, Apple and Amazon have had practically twin increases of 26%, while Alphabet (Google’s parent company) and Microsoft have added 18% and 12% respectively.
However, although the magnificent seven are stirring this trend thanks to their great weight in the index, the reality is that this ‘overvaluation’ of stocks does not respond only to this. Proof of this is that the S&P 500 Equal Weight, which cancels out the factor of overrepresentation of the large companies by giving the same weight to all values, has advanced 15% so far this year and is trading with a PER of 23.14 times. That is, less than the general index, but still above the historical trend.
“(Business) tax rates could rise as the United States works to reduce its budget deficits”
There are also other factors such as “the rate of aging of the US population” (and the world). This may be a relevant factor since the North American entity points out that, beyond the impact that an aging population will have on the economy, it has a direct and very rapid impact on market distribution. “Older investors tend to avoid stocks in favor of more conservative investments, such as bonds.” This would break a balance that is very favorable to equities, since “the average allocation to stocks is at historical highs. According to data from the Federal Reserve, this is above 42%.
Furthermore, JP Morgan sees a clear limit on the companies’ profits, which have been one of the great catalysts. “Globalization and increasing market concentration have contributed to profits growing faster than the economy since the early 1990s.”. But “tax rates could rise as the United States works to reduce its budget deficits.”
The report noted that stocks have proven resistant to the problem of the budget deficit in the US but “we believe that this could change in the next 5-10 years“. In any case, the problem of the deficit is something that is very present. If in 2023 it ended with 6.2%, in fiscal year 2024 it already reaches 6.4%. The Independent Congressional Budget Office ( CBO (for its acronym in English) believes that this will be the trend that is installed and that between 2025 and 2024, 20 trillion dollars in deficits will be generated, that is, that the US (federal) debt will escalate to 116% of GDP .
An S&P 500 flying in 2024
The most pessimistic, like Stiffel, believe that this overheating, rather than weakening in the future, will precede a major correction in the short term. Last week the firm published a report in which it said that “optimism has been exceeded and the S&P is trading following the path of classic frenzy“. In summary, the firm defends that the “excess value in the market is almost exactly the same as 1929.”
That is why, according to their calculations, the S&P 500 will fly up to 6,400 points to plummet to 4,750. A movement that will be carried out in 2025 and very aggressively, not so much as a factor that will weigh down the index for a decade, as the experts at Goldman Sachs and JP Morgan commented.
In any case, the general mood is that there will not be a major correction, but rather a market that will gradually relax. From US Bank they explain that they see “favorable economic fundamentals that They tell us that real growth (GDP) plus inflation Robb Hawoth, the firm’s chief analyst, comments that “it appears that although the stock has risen significantly for two consecutive years, there is still more upside potential.”
For its part, the latest Bloomberg Markets survey points to an S&P 500 accelerating by the end of the year according to the 441 economists questioned. This advance will come especially from a rise of mega cap companies after presenting their figures. “The Magnificent Seven’s turnaround after a lackluster quarter is an attractive trade to look at right now,” said Anastasia Amoroso, chief investment strategist at iCapital.
Although analysts recognize that elections can be a disruptive element in the markets. Good results, especially in technology and finance, will mark the direction of the index. “Nvidia’s results, due in November, will be the key focus for tech stocks.” In that sense, 45% of those surveyed believe that their figures catapulted the index to travel that complicated final stretch to the 6,000 points.
The Bloomberg analyst consensus is betting on an S&P 500 remaining at 5,600 points so far this year. Of course, this target price is affected by some predictions that have not been updated since the summer. In that sense, among the analysts who have updated their figures between the end of September and October there is a great dispersion. Bank of America, for example, sees the index at 5,400 while Goldman Sachs sees it at 6,000. UBS, for example, at 5,950. The most common figure is between 5,700 points and 6,000. “The macroeconomic context remains favorable,” commented David Kostin, of Goldman Sachs, after raising the range.
However, the problems concentrate from then on, when 2024 is over. The consensus of Bloomberg analysts is betting in that sense with 2025 with a slight growth of 0.2% to 5,874 points. In 2026 gains will accelerate to 6.6%. This will mark a clear acceleration but, in any case, the powerful revaluations of the last decade will now be in the rearview mirror to give way to a calmer era with a more moderate sentiment and where bonds could aspire to surpass the old king while other assets like gold or raw materials could aspire to take the throne.
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