It's easy to ignore the bad news when the S&P 500 (SPY) is hitting new highs and our net worth is rising. Unfortunately, it is often at these altitudes that the first signs of trouble appear…but they are hard to see at first. That's why you should read the latest insights from veteran investor Steve Reitmeister as he points to a disconnect between fundamentals and actual stock price action. Read below for more.
Thursday's better-than-expected PCE inflation report led to another rally that pushed the S&P 500 (SPY) again towards the tops at 5,100. That represents a hearty 5% return in February. Even better, market breadth improved with smaller stocks coming along for the ride in the final days of the month.
I hate to be the bearer of bad news…but unfortunately the basics are not fully supporting this rampant bullying. Especially since I don't believe things will get much better even after the Fed finally starts cutting rates.
Why is she?
And what does this mean for stocks in the coming weeks?
Get the answers below with my updated look and trading plan.
Market Commentary
In mine comment earlier this week I shared the following insight:
We should start the conversation with this provocative chart from FactSet comparing the movement of forward S&P 500 EPS estimates versus the stock index:
You will find that for most of the last 10 years, the dark line for profits is above the price action. That means the improved earnings outlook boosted stocks. However, every time we find the stock index climbing above the EPS outlook, it reverts to size as of 2022.
If the lessons of history are true, then it points to 2 possible outcomes.
First, it would be a correction to bring stock prices more in line with the true state of the earnings outlook. Something in the 10% range should do the trick with some of the more inflated stocks enduring a stiffer 20%+ penalty.
On the other hand, stocks may level off for a while by patiently waiting for rate cuts. This act is a known catalyst for greater economic growth that should finally push incomes higher bringing things back into balance with the price index.
Yes, there is a 3st the case where stocks just keep going up because investors aren't completely sane. Unfortunately, those periods of irrational exuberance led to much more painful corrections down the road. So let's hope that won't be the case here.
(End of previous comment)
However, here's what I left out of that conversation that needs to be added now. Even when the Fed finally starts cutting interest rates, it may not be as big a catalyst for earnings growth and stock price appreciation as investors currently believe.
Just think what is happening now. GDP is hovering around normal levels and yet income growth is below non-existent year after year.why is she
Because tough times, like a recession, lead to more drastic cost-cutting by company management. This lower cost base = improved profit margins and higher growth as the economy expands once again. And yes, this is the main catalyst for stock price advances.
But notice…we didn't have a recession. And unemployment remains strong. And so, there was never the major phase of cost-cutting, which ushers in the next cycle of impressive earnings growth, which pushes stock prices higher.
Or to put it another way, even when the Fed cuts rates…it can have a very modest impact on improved earnings growth because of what I just pointed out above. And that equates to less reason for stocks to rise further.
No…this does not equate to another bear market forming. As mentioned earlier, perhaps a correction is in the offing. Or is it more likely that the overall market will hold around current levels with a rotation from growth stocks to value stocks.
This is where we can add our edge with POWR Ratings.
Yes, it examines a total of 118 factors for each stock, finding the ones with the highest potential. 31 of these factors are in the Values camp (the rest being spread across Growth, Momentum, Quality, Safety and Feeling).
This value bias helps POWR valuations rise every year leading to an average annual return of +28.56% per year since 1999. This year we may be able to add to our advantage even more as growth prospects fade and the search for value takes center stage.
Read on in the next section for my favorite POWR Ratings value stocks to add to your portfolio at this time…
What should be done next?
Discover my current portfolio of 12 stocks filled to the brim with the best returns found in our exclusive POWR Ratings model. (Almost 4 times better than the S&P 500 since 1999)
This includes 5 recently added under-the-radar small caps with tremendous upside potential.
Plus I have 1 special ETF that is incredibly well positioned to outperform the market in the coming weeks and months.
All of this is based on my 43 years of investing experience seeing bull markets… bear markets… and everything in between.
If you are curious to learn more and want to see these 13 hand-picked lucky trades, then please click the link below to get started now.
Steve Reitmeister's Trading Plan and Top Picks >
I wish you a successful investment world!
Steve Reitmeister…but everyone calls me Reity (pronounced “fair”)
CEO, StockNews.com and Editor, Reitmeister Total Return
Shares of SPY were trading at $512.85 per share on Friday afternoon, up $4.77 (+0.94%). Year-to-date, SPY has gained 7.90%, versus a % gain in the benchmark S&P 500 over the same period.
About the Author: Steve Reitmeister
Steve is better known to the StockNews audience as “Reity”. Not only is he the CEO of the firm, but he also shares his 40 years of investment experience in Reitmeister Total Return Portfolio. Learn more about Reity's background, along with links to his latest articles and stock picks.
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