The S&P 500's recent ascent isn't just a random surge. It's a reflection of a recovering economy and, in my view, a signal for continued growth and compelling investment opportunities. This picture combines optimistic earnings with expected future interest rate cuts. It celebrates the ingenuity and dreamers’ mentality of retail investors themselves.
This last piece of data, the cumulative outperformance of the top quintile cohort in the S&P 500, relative to the bottom, is perhaps the most telling. This divergence serves to underscore the robust earnings growth we’re seeing from the market’s leaders. It indicates that the recovery’s benefits are not being broadly distributed—that’s instead showing up in businesses that are really killing it.
The expectancy of a 25-basis point reduction in interest rates has acted as a potent catalyst, injecting optimism into the market. With 89.2% probability of this rate cut coming to fruition, the market momentum has been driven by expectation alone. Interest rate decreases generally mean lower borrowing costs for businesses, encouraging more investment and growth.
The climate of the approaching earnings season makes it all the more interesting. A sneak preview of earnings season, 44 S&P 500 members have already released their results. I imagine this will trigger an avalanche of new market activity. Forthcoming positive earnings surprises would likely continue to drive the index upward, but more negative surprises could lead to sharp corrections. It’s a time of great volatility, but great opportunity.
The U.S. economy appears to be hitting its stride with the kind of growth that gets investors' blood pumping. Despite a surprisingly large monthly increase in core inflation for September, it all adds up to an inflationary picture heavy on the demand-side resilience. This growth story is incredibly important to the S&P 500’s continued march upward.
Interestingly, the changing tides of asset flows uncovers a morphing and fluctuating tug-of-war. If institutional investors have largely been in retreat, retail investors have made up for it. This historic boom in retail purchasing might give retail a needed cushion, helping to keep the market’s winning streak rolling despite institutional doubts.
The new emphasis on creating new tariff policies, as Freedman has recently pointed out, adds another level of complication. Trade tensions, which have more far-reaching effects on overall market sentiment and corporate earnings, deserve constant vigilance.
Investor sentiment on the ground, in my experience, has markedly chilled since the turn of the calendar. The March Investment Manager Index highlighted growing risk aversion linked to political uncertainty and a reassessment of the U.S. economic outlook. This caution is understandable considering the current geopolitical situation.
The difference between the market’s current pessimism and the hopefulness earlier this year is quite the juxtaposition. The constant chatter surrounding tariffs and increasing geopolitical tensions have been very damaging to investor confidence. Political environment, fiscal policy and central bank policy are all three of these now considered potential headwinds.
For example, the CNN Fear & Greed Index is locked at “Extreme Fear” levels. At the same time, the AAII Investor Sentiment survey shows that bearish responses are at their highest since the 2022 bear market, underscoring increasing fear from investors. This deep level of fear, in my experience, at least, almost always creates contrarian buying opportunities.
Looking ahead at 2024, the Communication Services sector has already jumped out to an early lead. This remarkable growth is being driven by the heavyweights like Meta and Google responsible for giving return 70% and 37%, respectively. This sector’s eye-popping growth is testament to the ever-growing power of digital platforms in our economy.
Our most outstanding sector has been Information Technology. Last year, Apple squeaked back ahead of Nvidia, gaining 171% in 2023 (vs.) close to Nvidia’s 33% gain year-to-date in this example. These gains are a testament to the continued power of creative destruction in driving technological innovation and enhancing market valuations.
The biggest exception is the Industrials sector, where the positive balance is pronounced. Last year, it generated four of the top 10 stocks, including GE Vernova and United Airlines. That would indicate an overall recovery in industrial and transportation activity.
Utilities have witnessed a sharp reversal from 2023, fueled by rising electricity demand from AI hyperscalers, with returns of 20.1%. This change highlights the increasing energy demands of the emerging AI industry and its effects on the utilities industry.
The financials have had the best run in the index, they still carry one of the lowest price to earnings ratios of all the S&P 500 sectors. This is taken as a sign that financials should provide the most relative value compared to the other sectors.
For investors who want to take advantage of the S&P 500’s long-term promise, three approaches stand out. By investing in an S&P 500 index fund or ETF, you gain instant diversification across all 500 stocks in the index. Well, you can do all that with one smart investment!
Using S&P 500 mutual funds or index ETFs as the base building block of your portfolio. Further they are very liquid and trade with very tight bid-ask spreads, making them desirable for incorporation into nearly all investment portfolios.
Tap into the S&P 500’s historic resilience even during periods of economic turmoil. It’s no surprise given its strong track record of delivering market-beating returns. This is even the case in difficult periods, like the Great Inflation decade of 1971 to 1980.
Open a brokerage account and direct the funds to buy S&P 500 stocks or funds. That way, you can custody these assets within a well-protected and regularly audited environment.
The S&P 500 is another important benchmark, but not really for the reasons that you may think. It does a great job of capturing the true growth drivers behind our economy in the U.S. Those things are what make it so stable and long term.
In my view, the S&P 500's ongoing rally is more than just a fleeting moment. It's a testament to the resilience of the U.S. economy and the enduring appeal of its largest companies. Though much work still lies ahead, the index is proving to be a worthwhile compass for investors charting a course through the market’s uncertainties.
