The stock market has been on a tear, hitting record highs despite a host of uncertainties.
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The S&P 500 is up more than 21% so far this year, rebounding from an August swoon and rising about 65% since bottoming out in September 2022. Kristy Akullian, head of iShares investment strategy, Americas, at BlackRock, says, “We’ve been surprised to the upside by how resilient equity markets have been, even in the face of a lot of volatility over the last few weeks.” She cites uncertainty around fiscal stimulus in China, rising geopolitical tensions, a close presidential election in the US, stretched valuations, recent weakness in tech, and fears of a consumer spending slowdown as potential warning signs.
Yet, the market has taken it all in stride. Strategists attribute the rally to a surprisingly strong economy, giving investors confidence. Inflation has fallen dramatically over the past year, and recent labor market data has been healthy.
Global Market | USA: S&P 500 and the Dow soared to record closing highs on Friday📉
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Consumers are still spending, wages are growing, and corporate profits have remained resilient. Federal Reserve interest rate cuts have also contributed to the gains.
About 67% of stocks outperformed the S&P 500 in Q3, which was the best breadth quarter since 2002: Bank of America. "We think the rotation is likely to continue."
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Growing confidence about the economy and interest rates helped spark a recent rotation away from tech stocks into value and smaller capitalization stocks.
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Stock market shows surprising resilience
Bryant VanCronkhite, senior portfolio manager at Allspring Global Investments, sees this as a positive development, indicating a healthier market and a more durable rally. However, strategists warn that trouble during earnings season could disrupt the bull run.
James Ragan, director of wealth management research at DA Davidson, says, “If we get a couple of weeks into earnings season and have some high-profile misses, I think that could derail things.”
Investor enthusiasm surrounding AI has sent tech stocks soaring, but there are concerns about when heavy investments in the technology will begin paying off. Akullian thinks gloomy forward guidance from the tech sector could cause the market to falter. Strategists recommend a balanced approach to navigate the unknown factors, including the economy’s path, the presidential election outcome, and geopolitical developments.
Ragan advises investors to “stick with high quality. Stick with companies with a little bit more visibility for continued earnings growth.”
While the rally has been impressive, some strategists are nervous that stocks are rising too rapidly. Yardeni Research warned clients last month, “The risk of a melt-up has increased.” They question whether exuberance is turning from rational to irrational, reminiscent of the late 1990s tech bubble.
As the S&P 500 approaches its two-year bull market anniversary, Thomas Martin, senior portfolio manager at GLOBALT Investments, believes its next leg up will be driven by earnings. He expects the market to broaden out from technology leadership in 2025, powered by earnings growth and a resilient consumer as the Federal Reserve continues easing interest rates.
