Wall Street’s 19-session journey back to all-time highs has been swift but healthy. The S & P 500 on Wednesday closed above 5,300 for the first time ever. One day later, the Dow made history by topping 40,000. Despite a slightly lower close Thursday and a mixed bag Friday, the market still was tracking to deliver strong weekly gains. More important than those benchmark recoveries from last month’s lows have been the tailwinds supporting the participation of more stocks and more sectors in the upswing. It’s a positive sign when bull markets broaden out. Recent earnings estimate increases have given us confidence that any pullbacks in this extremely overbought market should be viewed as buying opportunities. Higher odds of an interest rate cut or cuts by the Federal Reserve this year are certainly helping justify stock valuations. The last time the S & P 500 Short Range Oscillator was this overbought was back in December. It was followed by about a 2% pullback at the beginning of this year. Then it was off the races and records until a terrible month of April interrupted the rally. The upswing picked up after the S & P 500’s most recent bottom on April 19 and pushed to this week’s records. .SPX 1Y mountain S & P 500 – 1 year There is no telling whether the current overbought market will follow a similar pattern. So, our discipline says we should do some selling to raise some cash just in case. This week , we trimmed Morgan Stanley and Palo Alto Networks on Wednesday and Thursday, respectively, following recent rallies in each. When a pullback comes, as it always does, that’s when we look to buy. But the big question is: How deep of a decline could be coming once the current momentum dies down? To determine that, we need to figure out where the earnings revisions are coming from and where they are going. Earnings estimates Looking at earnings estimates for the 11 S & P 500 sectors — using the SPDR sector exchange-traded funds (ETFs) as proxies — we found that three out of the top five weighted sectors in the S & P 500 saw their 2024 earnings estimates revised higher between the end of 2023 and the end of the first quarter. Meanwhile, five of the bottom six sectors saw downward earnings estimates between the end of 2023 and the end of the first quarter. During that time, Fed rate cut expectations for 2024 were around five or six. The market, coming off a strong 2023, powered higher in the first three months of the year. Stocks ran into a brick wall in April as moderating inflation ticked higher and Fed cut odds plummeted. It’s important to consider sector weighting because the S & P 500 is a market cap-weighted index, meaning the biggest companies and sectors by stock market value have the greatest impact on the index. Since the end of the first quarter, four of the top five sectors have seen upward earnings revisions, with the financial sector joining the party. Perhaps more telling, four of the bottom six sectors saw earnings estimates revised higher since the end of the first quarter. Real estate estimates have remained pretty much where they were coming into 2024. This tracks with the broadening out thus far in May. In fact, all the S & P 500 sectors were positive for month to date (energy was on the bubble), despite only five of them up on a quarter-to-date basis. That starkly contrasts what we saw in April’s drawn down when utilities was the only sector to advance for the month. Since last month’s low, the market has taken solace in some cooler recent inflation reports. So, why does this matter? It’s because this broadening has been supported by a better outlook for U.S. corporate earnings compared to where we were just 45 days ago. While fewer Fed rate cuts are expected since then, it’s for the right reasons of stable growth and stable inflation. Rates get cut to support a slowing economy as lower rates help equity valuations. But rate cuts in and of themselves are not the goal. Rather, the goal is to find the right rate equilibrium that keeps inflation at the Fed’s 2% year-over-year target rate, and the economy chugging along at a healthy pace. Inflation has yet to come down to the Fed’s target rate despite 11 rate increases since March 2022. Valuation dynamics While stock price-to-earnings valuations matter, especially when investing longer term, underlying earnings estimate revisions are going to have more impact on near-term price action and must be considered when trying to assess whether a move is supported by the fundamentals or based on what some may refer to as “animal spirits.” If the move is supported by the fundamentals, then it means pullbacks should be expected to be relatively shallow, and therefore looked at as opportunities. If, on the other hand, we’re seeing stock prices move higher while estimates are either unchanged or being revised lower, then it means the move is based on momentum and multiple expansion. That’s not a sustainable dynamic and pullbacks in those instances must be approached with increased caution. Fortunately, the current market dynamic appears to be more of the former, fundamentally driven, as valuation multiples have not moved much since the end of the first quarter. They are, however, up compared to the end of 2023 and that should not be ignored. While stocks are more expensive since the end of 2023, those higher prices are being supported by the notion that Fed cuts are coming, which were in question as the first quarter came to a close. Bottom line The upward earnings estimate revisions reflect an improved outlook for corporate earnings (which is, of course, the primary financial metric used to value equities). As a result, stock price appreciation appears to be supported by the fundamentals. This means any working off of the overbought market should not be concerning and pullbacks should be viewed as chances to buy. While the timing of a Fed rate cut or even cuts this year remains uncertain, we see easing as the next move by central bankers, not more tightening. This supports multiples, as investors should be more inclined to pay up a bit now on the view that earnings will grow into the valuations. (Jim Cramer’s Charitable Trust is long PANW, MS. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
Visitors around the Charging Bull statue near the New York Stock Exchange on June 29, 2023.
Victor J. Blue | Bloomberg | Getty Images
Wall Street’s 19-session journey back to all-time highs has been swift but healthy.
The S&P 500 on Wednesday closed above 5,300 for the first time ever. One day later, the Dow made history by topping 40,000. Despite a slightly lower close Thursday and a mixed bag Friday, the market still was tracking to deliver strong weekly gains.
More important than those benchmark recoveries from last month’s lows have been the tailwinds supporting the participation of more stocks and more sectors in the upswing. It’s a positive sign when bull markets broaden out.
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