US Market - Bear Trap in the Making ?
Where Are We ?
In case you are unaware, last Sat, 12 Oct 2024 marked two years since stocks bottomed out before going on a run.
The Dow Jones, Industrial Average (46%), S&P 500 (62%), and Nasdaq 100 (88%), have all posted strong returns in the two years since, with the S&P 500 reaching a new high on Mon, 14 Oct 2024.
The 3rd Year Curse.
However, history suggests investors need to be prepared for a potential setback in the coming 12 months.
According to CFRA Research, Chief investment strategist, Sam Stovall - since 1947, all 11 bull markets that celebrated their 2nd birthday experienced at least one decline of -5% or more in the subsequent 12 months, with some even turning into new bear markets (see above)
On average, after these good 2-year periods, the market only goes up by +2% (in the 3rd year).
In fact, all 11 bull markets, saw a drop of at least -5% in the following year.
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5 of them had a drop of between -10% and -20%.
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3 of them turned into bear markets.
More Proofs.
The S&P 500 has gone up by almost +64% since October 2022, when it was at its lowest of 3,577.03.
Just Mon, 14 Oct 2024, the index surged even more (+0.8%) to finish at 5,859.85.
Above table (11th record) shows that in the 1st year of the current bull market, the S&P 500 went up by +22%. This was the 3rd lowest increase since 1947.
Interestingly, the index posted the highest of all 2nd-year increases of +34%, versus the median of 11.5%.
In Stovall’s view, the current high valuation of the US stock market, especially large-cap stocks, is “concerning” as the bull market enters its 3rd year.
The price-to-earnings (P/E) ratio for the S&P 500 is currently 25. This is the highest it has been in the 2nd year of a good period since World War II.
It is also 48% higher than the average 2nd-year P/E for all good periods since 1947.
Stovall says that P/E ratios usually go down in the 3rd year of a good period because companies' earnings tend to grow faster.
Wall Street Expectations.
According to FactSet Research, Senior earnings analysts, John Butters, Wall Street analysts are expecting followings YoY earnings growth rates:
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+14.2% for Q4 2024.
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+13.9% for Q1 2025.
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+13.1% for Q2 2025.
They are also expecting earnings to grow by about +15% in FY 2025, compared to about +10% in FY 2024.
My viewpoints : (mine only)
It is helpful to know what has happened to the US stock market in the past, especially when there is no consensus on exactly how 2025 will shape up.
Earnings season, which is in full swing this week, will provide more clarity where things are headed.
With 41 S&P 500 companies expected to report results this week, new data points from corporate America will help investors assess the health of the US economy, and whether companies can continue to justify stretched stock market valuations.
Expectations are high, and for good reason, statistically the S&P 500 has enjoyed YoY earnings growth for 4 consecutive quarters.
US Banks quarterly earnings should be able to help US market rally this week.
Case in point, $Goldman Sachs(GS)$ has just handed in a stellar earnings report card for Q3 2024.
The bank’s report card :
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Earnings per share (EPS): $8.40 per share vs. $6.89 LSEG estimate vs $5.47 (Q3 2023).
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Revenue: $12.70 billion vs $11.8 billion estimate vs $11.87 billion (Q3 2023).
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Net income: $2.99 billion vs $2.06 billion (Q3 2023).
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Goldman Sachs has gained a healthy +35.19% YTD.
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At its lowest, it traded for $376.91 per share.
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It touched $538 per share intraday on 15 Oct 2024.
Business Outlook.
With the Fed’s planned interest cut into 2025, Goldman is positioned to benefit as corporations that have waited on the sidelines to acquire competitors or raise funds begin to take action, and rising values bolsters its asset and wealth management business.
With banks’ prospect in FY 2025 looking “bright”, is it time to explore investing in US banks?
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