Following the strongest performance for the S&P 500 Index since November, which propelled the US stock gauge close to its March record levels, investors now confront a crucial decision.
They must determine whether the recent downturn witnessed earlier in the month was merely a temporary setback, or if the possibility of postponed policy easing by the Federal Reserve could potentially drag the market lower once more.
It’s my current expectation that the US and European stock markets record-breaking rally will continue despite the US central bank perhaps not cutting rates at all until 2025 due to stickier than expected inflation.
What fuels this optimism? The answer lies in the strengthening confidence in the global economy, underpinned by robust growth in the US, signs of a Chinese resurgence, and promising forecasts from institutions like the International Monetary Fund (IMF) and Bloomberg surveys indicating Eurozone growth.
The backbone of confidence
At the heart of the bullish sentiment pervading international markets lies the resilience of the US economy. Key indicators, including consumer spending, job creation, and corporate earnings, paint a picture of a nation on the path to continued growth. This robust performance serves as the backbone of confidence, instilling trust among investors in the stability and strength of the world’s largest economy.
In parallel, signs of a rebound in China, the world’s second-largest economy, further fuel optimism in the global economic outlook.
China’s swift recovery from the pandemic-induced slowdown, propelled by robust industrial production and resilient consumer spending, not only boosts its own economic fortunes but also serves as a catalyst for global growth.
As a key driver of demand for commodities and a vital market for multinational corporations, China’s resurgence reverberates across international markets, reinforcing the bullish sentiment prevailing in the US and European stock markets.
The recent upward revisions in global economic forecasts by institutions such as the IMF and Bloomberg surveys indicating an expected Eurozone growth pickup from 2025 onwards also serve as additional fuel for the optimism fire.
In addition, preliminary findings from the ongoing reporting season indicate that approximately 81% of US companies are surpassing expectations, even amidst heightened interest rates.
First-quarter earnings are projected to rise by 4.7% compared to the previous year, surpassing the initial estimate of 3.8%, as per data gathered by Bloomberg Intelligence.
Analysts anticipate S&P 500 profits to surge by 8% in 2024 and by 14% in 2025, following a period of subdued growth last year, according to data compiled by BI.
In anticipation of a market rally, consider boosting exposure to growth stocks, particularly in sectors expected to benefit from economic expansion. This may include tech, healthcare, and consumer discretionary sectors. Look for companies with strong earnings growth potential and innovative business models.
As economic conditions improve, consider rotating into cyclical sectors such as industrials, materials, and financials. These sectors tend to perform well during periods of economic recovery and may offer significant upside potential as the market rally gains momentum.
Also, small and mid-cap stocks typically outperform during market rallies due to their higher growth potential and greater sensitivity to economic conditions. Consider adding exposure to these segments of the market to capitalize on their potential for outsized returns.
As always focus on high-quality companies with strong fundamentals, including solid balance sheets, consistent earnings growth, and competitive advantages. Look for companies with strong management teams and a track record of delivering shareholder value.
While increasing exposure to growth and cyclical sectors, it’s of course essential to maintain a balanced portfolio to manage risk effectively. Continue to hold a diversified mix of assets across sectors, geographies and currencies.
Also, stick to your long-term investment strategy and avoid making impulsive decisions based on short-term market movements. Market rallies can be volatile, and it’s essential to remain disciplined and patient, focusing on the fundamentals of your investments rather than chasing short-term gains.
Nigel Green is deVere CEO and Founder
Also published on Medium.
