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Companies are starting to report their first set of earnings for 2024, and they matter more than usual for stocks because the other main support for elevated markets—hope for rate cuts—is being chopped away.
At the start of the year, hopes for as many as six or seven rate cuts in 2024 spurred optimism about stocks. Now, traders keep dialing back expectations. Interest-rate futures now imply that one or two quarter-point cuts are more likely than the three that Fed officials forecast in March.
On the earnings front, Wall Street expects a lot of profit this year, next year and, in early forecasts, 2026. However, the market as a whole is already priced for unusually fast growth. The S&P 500 trades at a multiple of 21 times predicted earnings 12 months ahead, a level exceeded only during the dot-com bubble and the pandemic rebound.
When expectations are lofty, profit margins are already high, which makes it hard to raise them still further. Companies are already extracting the highest share of the value they add to the economy—technically, profit per unit of real gross value added—since World War II.
The stock market is arguably priced for perfection. Trends and momentum can last well beyond fair value, but the risks get bigger. At PWM, we hedge exuberance with prudent diversification amongst capitalization and geography, growth and value, stocks and bonds, and public and private markets.
Interest Rates Have Investors Worried. Profits Give Them Comfort.
by James Mackintosh
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