Many seasoned investors are getting a little worried about stocks rising to 5,100 for the S&P 500 ( SPY ). This is because earnings growth is almost non-existent and thus share prices are going to elevated levels. This could point to a nasty correction ahead. That's why you'll want to tune in to Steve Reitmeister's most up-to-date market commentary along with his trading plan and top picks. Read below for the full story.
Yes, the rush to 5,100 for the S&P 500 (SPY) was impressive. But just like last year, we see a lot of recent gains flowing into Magnificent 7 stocks. Much of that is thanks to “off the chartsNVDA income report.
Unfortunately, the broader we look… the harder it is to feel uber bullish. Especially true with the Fed signaling that June is the first rate cut (and again…maybe even later than that).
This creates an interesting investment landscape where stocks are at all time highs and yet earnings growth is very low. Not a great recipe for future stock market growth.
Let's dig deeper into this vital topic in this week's Reitmeister Total Return commentary.
Market Commentary
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.
So it's interesting to think that the recent rally in stocks that began in November was met with the caveat that the Fed would soon cut rates. And yet, as time goes on, we find that this is not true with the start date being pushed back further and further.
Last week's release of the FOMC Minutes reaffirmed the Fed's tough intention not to act too early to cut rates so as not to risk inflation staying above trend for too long. That news, on top of # hotter-than-expected CPI inflation this past month, has investors recalculating when the Fed will officially start cutting rates.
Right now, chances are the first rate cut will happen on May 1str the meeting stands at just 19% from an 88% chance a month ago. This has brought more sight to June being the starting line as the market puts that probability at 63%, which is good but not great conviction.
Back to the S&P 500 earnings chart above…I believe stocks are running well ahead of fundamentals. 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.
Trading Plan
I believe that 2n.d The above scenario is the most likely. This is where the S&P 500 levels off for a while. Perhaps climbing into tight consolidation below recent highs of 5,100. Or perhaps a wider trading range to the previous breakout level of 4,800.
My biggest hope is that the recent rotation toward small-cap stocks continues to unfold. For example, over the past three sessions the S&P 500 has actually slipped slightly from its highs. All the while, small caps in the Russell 2000 have generated a much more impressive +2.2% gain…and are finally back in positive territory for the year.
The bottom line is that we are rightfully in a bull market. Only sometimes does price action get ahead of the fundamentals. So this either creates a pause period…or correction. I think the first is the most likely scenario.
In that environment, the overall market doesn't move much, but overpriced stocks are generally squeezed, while value stocks are bid up.
We have a tremendous advantage in finding those stocks with the best value thanks to the 31 value factors within the POWR Value model. You and I don't have enough hours in the day to manually rate those 31 factors for all 5,300 stocks measured by the POWR Ratings model.
Computers happily do the heavy lifting for us every night making it much easier to choose the stocks that end up in our portfolios.
What are in my portfolio right now?
Read below for the answer…
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 $506.93 per share on Tuesday afternoon, up $0.94 (+0.19%). Year-to-date, SPY has gained 6.65%, 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.
Post Is this chart pointing to a stock correction? appeared first on StockNews.com