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Market Milestones Amid Speculation: S&P 500 Hits New Highs with Cautious Horizons


Lauren Miller

March 9, 2024 - 14:23 pm


Riding the Economic High: Unveiling the Market's Record Triumphs and Tentative Hints of Slowdown

The enigma of refining perfection occupies both the boundless chambers of philosophical thought and the grounded ambit of today's investors. The stock market, basking in a concatenation of nearly faultless conditions, has, for months, indulged in an economic feast. Recount the tale of the S&P 500 achieving new zeniths the previous week and amassing a staggering 25% escalation since the waning days of October. One might attribute this market surge to a blend of an endearing Goldilocks economic upturn, a soothing global disinflationary environment curtailing bond yields, bountiful credit markets, and an evident surge in earnings growth. These elements coalesce to craft a compelling account of the index's recent highs.

Adding to this abundance, the Federal Reserve hints at a reduction in the policy rate by the summertime, proffering its well-deserved right to 'normalize' rates amidst economic serenity with stocks at their apex rather than grappling with a macroeconomic slide amid market tumult. Complementing this fiscal narrative is the burgeoning enthusiasm for AI-driven semiconductor stocks and in-vogue weight-loss pharmaceuticals, propelling the market on waves of optimism, rewarding investors abundantly, and successively neutralizing an array of risks.

Despite this, the last Friday's market activities inadvertently signaled that the rally might have encountered an "enough for now" phase. This juncture is characterized by market prices and sentiment potentially overtaking the accumulated positives. An initially buoyant market response to the favorable jobs report, illustrating moderate employment gains, increased labor supply, and tempered wage inflation, was marred by a stumble in some of the market's front-runners.

The Unraveling of Nvidia's Bull Run

Take for instance Nvidia's episodic performance, which transformed within a mere six hours from an exuberant 5% surge to a 5% decline, on an extraordinarily voluminous trading day. This sharp reversal, potentially the first glimpse at what a momentum unwind might entail, showcased Nvidia as the emblematic beacon of the AI investment theme. The stock's market value rocketed by $1.5 trillion in the preceding year, and recently it nearly rivaled Apple's heavyweight standing in the S&P 500. It's noteworthy that during this timeframe, Nvidia's valuation moderated from a 60-fold forward earnings to 34 as its revenue and profit forecasts burgeoned.

This might bring some reassurance to the market, yet there remains skepticism about the sustained viability of such growth rates and how they could result in a less generous price-to-earnings ratio. The historic premise that a company of Nvidia's magnitude, boasting a $2.2 trillion market cap, can sustain a 34-time forward P/E ratio is found wanting. Nvidia's recent encounter with a prior six-year high trend line, which integrates interim peaks from early 2018 and late 2021, adds credence to the sentiment of market sufficiency.

Surfing the Momentum Wave—and Its Potential Fall

Nvidia's soaring trajectory exemplifies the domineering momentum-factor trade of late—investing in what thrives while eschewing what lags. This phenomenon isn't sequestered to the tech sector or semiconductors. It seeps through the entire market landscape, with companies like Costco in retail, Eli Lilly in pharma, and Martin Marietta Materials along with Vulcan Materials in basic materials, representing epitomes within their respective segments. A long-term chart from 3Fourteen Research unveils that we may be at an apex with the percentage of the S&P 500 market capitalization accredited to the 100 highest-momentum stocks over the prior year appearing to peak. This configuration underpins the hypothesis of impending market turbulence, or even a modest pullback.

As the S&P 500 Volatility Index inches close to 15 and showcases a clear ascending pattern across three months, it subtly hints at potential market upheaval. Investors are either poised for a break in tranquility or are adjusting to a higher-velocity market environment. Nonetheless, such oscillations, or the broader market context, scarcely dictate an immediate and profound alter in market dynamics or actions entrenched in deep conviction.

In striking contrast, on that very Friday, the market managed to minimize conspicuous losses, with the S&P 500 dipping a scant two-thirds of a percent. The market's inherent capacity to reorient itself stood out, with previously lagging giants like Apple and Alphabet now perking up as momentum faded. The equilibrium of up/down volume, together with the resilience of consumer cyclical stocks, and a significant contrast of new 52-week highs versus lows across the NYSE and Nasdaq, all confers reassurance, albeit signaling an overbought status.

Indicators of Assurance within an Extended Market

The thread of trend indicators is reassuring external observers. This manifests in the market's effortless persistence in an overbought state for more than four months without a 3% regression. Confirmatory signals also arise from solid global equity indices and record-breaking metrics from the equal-weight S&P 500 and the mid-cap benchmark. Although sentiment and position metrics inch closer to the 'excessive optimism' corridor, they have yet to firmly root in concerning territory. After all, bull markets often nurture such elevated mood indicators for extended periods.

Contrariwise, certain metrics such as net short positions on the S&P 500 futures and restrained brokerage strategists' index targets, suggest that the proverbial wall of worry has yet to be fully surmounted. The market's comportment thus far in 2024 parallels several auspicious risk-vs.-return epochs, akin to the years 2017, 2013, and 1995—each emerging from a cycle of macroeconomic and policy challenges, bolstered by mid-cycle dynamics favorable to equity valuations.

At the core of this invigorating scenario lies the macroeconomic climate, unwaveringly propitious. An annual nominal GDP growth hovering near 5%, 10-year Treasury yields around 4%, and record 12-month forward earnings estimates collectively form a robust foundational and psychological pad that could weather the first significant market downturn without exacerbating into a severe decline.

Reflecting on the Perfect Macro Moment and Its Pricing

With the current market behavior embodying a "mid-cycle" style—characterized by stability, upward trends, and occasional monotony—it becomes challenging to discern the market's ongoing risk and reward components. It's evident the market currently is far from appearing inexpensive, underappreciated, or underutilized. Citi's strategist, Scott Chronert, articulates that the market anticipates a robust 11.6% annual free-cash-flow growth for the S&P 500 over the forthcoming half-decade—a formidable yet precarious prospect leaving a narrow margin for future compressions.

This weekend marks a pivotal historical moment—the 15th anniversary of the post-financial-crisis bear-market basin in March 2009. Since that crucial recovery inception, the S&P 500 has accorded investors a remarkable 16.7% annualized total return, even after withstanding two bear markets alongside two other significant and lingering corrections. While the index could potentially edge higher, echoing the secular bull market commencement in August 1982 that culminated in an over 19% annual return, it is paramount to consider the potential for the markets to oscillate from abundant to lean years. On the eve of the March 2009 nadir, the trailing 15-year return stood at a meager 4.4%, and the index languished below its level from 12 years prior—an unassuming yet propitious entry point, murky to most investors back then.

In the grand chronicle of market dynamics, investors might not anticipate significant favoritism moving forward, considering there's already substantial profit already in play. This does not, however, imply an impending turning of the tides where the market exhausts its current generosity.

Finally, linking to the discussions on Nvidia and momentum trades, readers can engage further with in-depth analysis provided by 3Fourteen Research: 3Fourteen Research, where insights into market patterns and factor performances are extensively examined.

As the stock markets continue to traverse this landscape of prospering valuations, investor optimism, and potential overextension, the vision imparted by the collective performance of companies like Nvidia, Apple, and Eli Lilly harmonizes a narrative of resilience. The market remains a bastion of unprecedented gains, yet signals remind the investor community of the inherent cyclical nature of the financial world.

As we reflect on the market's trajectory, from the buoyant waves that have carried it to the crest of optimism, to the recent signs of momentum unrest, it is discernible that the dynamics of investing remain ever-evolving. The dance between exuberance and caution continues to play out, with each investor and spectator keenly observing the market's next move. In the pursuit of perfection in portfolio performance, the adage of 'only change is constant' sits at the heart of the investment world, guiding us through the undulations of stock market narratives.