(Bloomberg Opinion) — All sustained bull markets need positive periods to keep them moving higher, and next month will be a desert of good news.
First, consider the perspective on Monetary Policy Land. Interest rate cuts that seemed inevitable a few months ago have apparently been delayed, perhaps until mid-summer. Although I am an avowed medium-term inflation optimist, the market has just digested two consecutive consumer price index reports in which monthly core inflation was above expectations. Yes, the excessive seasonality of the beginning of the year was probably a factor in the raucous numbers, but that may also flow into March.
There is little reason for Fed Chairman Jerome Powell to encourage talk of imminent easing once policymakers meet later this month, and some risk that his language will prompt traders to make a first cut even Later. A third hit on the inflation front would also push market narratives in a much hawkier direction: some traders would scrap 2024 rate cut bets and hike warnings altogether. increases it would spread in the financial media.
Next, is the revenue perspective. Artificial intelligence superstars Nvidia Corp. and Microsoft Corp. clearly have momentum on their side, but investors will have to wait until their next quarterly reports in late April and May for another shot at the drug of their hopes and dreams. Of course, investors will hear from CEO Jensen Huang at the annual artificial intelligence Nvidia GTC conference starting March 18, but history shows that event is rarely the stock market catalyst that its quarterly earnings guidance has become.
The stock's one-month average return since the start of the conference call is about 2.8%, which is actually below normal for a stock that has gained about 3.3% per month since 2009.
And those living American consumers who have raised shares of Amazon.com Inc. at Abercrombie & Fitch Co.? They're still there, but they seem to be spending a little more diligently. A report on Thursday showed US retail sales were essentially flat in February after falling in January, based on the so-called control group (which excludes food services, car dealers, hardware stores and gas stations , and ultimately feeds into gross domestic product .) The service economy may be holding up somewhat better, but overall consumption looks like a tailwind that is fading over the next couple of months.
None of this is “liquidating stock portfolios, buying Treasuries and hiding in an underground bunker.” However, it comes against a backdrop of high price earnings multiples that I can rest easy on for so long. At 21 times forward earnings, valuations are now well above pre-pandemic rates and are approaching the levels that prevailed in 2021. Some of this P/E shift is a rational reflection of an index that is weighted more toward fast-growing technology and communications services stocks with low financial leverage and high return on capital (as I argued here in January.) But no matter how I massage the data these days, I can no longer deny that US large-cap stocks look expensive. Not bubble-level expensive, but still rich and in need of fresh inspiration.
While the index is up 1.1% in March, in some ways it looks like the long-awaited market pullback is already here. Consumer staples (+1.4%) are beating consumer discretionary (-2.3%); gold is among the best performing commodities; and the once high-flying Magnificent Seven growth stocks have morphed into Magnificent Nvidia, Dumpster Fire Tesla Inc. — and five other average-performing stocks.
The current backdrop actually looks a bit like it did in 2018. Then as now, the market was coming off a spectacular year. Interest rates remained higher for longer than markets would have hoped or expected. And notorious loose cannon Donald Trump is sowing policy instability on social media (while waging a very public trade war with China). saying the next draw will be somewhere close to bad; there are many reasons to remain optimistic in the medium term. But markets can't go up, over and over, forever.
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