Paul R. La Monica
What goes up...doesn't have to come down much?
Sure, stocks have taken a breather in April following a solid first quarter. But even though volatility has increased this month, the S&P 500 is still only about 5% below the record high set in late March. Stocks tumbled Thursday following the weaker-than-expected GDP report. Still, the broader market is only halfway to a full-blown correction, a 10% pullback. And several investing experts said they aren't expecting a correction soon.
There are plenty of reasons for investors to be concerned. Tension in the Middle East remains high. The Federal Reserve is making it abundantly clear that the agency's still worried about inflation, and is in no rush to lower interest rates. And earnings for the S&P 500 this quarter -- when the Magnificent Seven tech giants are removed -- are expected to be lackluster.
But despite these worries, strategists point to other factors that could keep stocks on a mostly upward trajectory even if there will be fits and starts.
"We expect more of a market consolidation instead of a correction," Yung-Yu Ma, chief investment officer with BMO Wealth Management, wrote in a recent report. "The stock market doesn't need Fed rate cuts or even falling inflation, but it's also not in a robust position to quickly digest risks that could arise from accelerating inflation, increasing geopolitical shocks to oil prices, or rising long-term interest rates."
He added that "the Goldilocks narrative of high growth and falling inflation could return within a couple of months, but it's also possible to have choppier markets that take time to digest its recent gains and allow fundamentals to catch up with valuations."
The good news on that front? Earnings growth is expected to pick up as the year progresses. Tech stocks may continue to lead the way, but other sectors should participate as well, thanks in part to productivity booms from artificial intelligence.
"All the positive catalysts are still there. AI has the potential to be the internet 2.0, and create another bull market," said Jason Hsu, chief investment officer with Rayliant Advisors.
To that end, AI chip giant Nvidia and Microsoft, which has a $10 billion investment in ChatGPT developer OpenAI, are top holdings in Hsu's Rayliant Quantitative Developed Market Equity exchange-traded fund.
Other major macro worries may create only short-term headline risks. Geopolitical concerns have not led to a massive spike in oil prices yet. And the Fed's likely delay in lowering rates is also actually a good sign. Why cut when unemployment is still hovering near its lowest level in more than half a century?
But strategists think investors need to be more selective. The drops in Apple and Tesla shares this year show that investors are no longer treating the tech sector as a monolithic trade that only goes up.
"We're going to have more volatility going forward," said Marvin Loh, senior global macro strategist with State Street Global Markets. "The macro environment is faced with uncertainty and earnings expectations for the second half of the year are pretty robust."
That said, Loh and his colleague Cayla Seder, macro multi-asset strategist for State Street, told Barron's the market should continue to grind its way higher.
Seder thinks April's market volatility was about Wall Street "repricing Fed expectations." But she believes large "growthy tech stocks" are still the best bets thanks to their strong balance sheets and healthy fundamentals, adding that now isn't the time to ditch large tech for big-dividend-paying industrials, utilities, and consumer-staples stocks or small caps.
The market still looks reasonably healthy from a technical standpoint, too. More slumps are likely, but the odds of a major crash seem low, according to Adam Turnquist, chief technical strategist for LPL Financial.
Turnquist pointed out in a recent report that the S&P 500's recent slide has led to "oversold conditions" during the week of April 15. Turnquist said selloffs of that magnitude "have often been found at relief rally inflection points."
Turnquist conceded that the risk of a correction is "not out of the cards." But he also added that it would be "completely normal within a bull market." The last correction was in late October 2023.
Still, Turnquist thinks that the S&P 500 sliding to 4,800 is "a worst-case scenario." That's about 4% below current levels and around a 9% drop from the record high, falling just short of a correction. He expects a "relatively shallow drawdown" thanks to the continued leadership of tech, a broadening out of the rally to other sectors and "resilient economic data."
The market bears may need to stay in hibernation a little while longer.
Write to Paul R. La Monica at paul.lamonica@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
April 25, 2024 10:45 ET (14:45 GMT)
Copyright (c) 2024 Dow Jones & Company, Inc.
Comments