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US Perspectives - The US equity rally continues despite reduced Fed rate cut expectations

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US Perspectives - The US equity rally continues despite reduced Fed rate cut expectations

May 31, 2024

  • The S&P 500 rallied 6.8 per cent between 19 April and 24 May 2024, outperforming the MSCI World index and most major market indices. Growth far outperformed value, rising 10.3 per cent, while value only rose 2.6 per cent. Valuations have expanded but remain well contained and below prior market peaks
  • Through 24 May ’24, 96 per cent of companies in the S&P 500 have reported their earnings. So far, 78 per cent of companies have beaten consensus earnings expectations. That is above the 5-year average of 77 per cent and the 10-year average of 74 per cent. At this point, first-quarter earnings for 2024 are up 6.0 per cent y-o-y. If this persists, it would be the highest growth rate for earnings since 1Q22 of 9.4 per cent
  • For equity investors, analysts are projecting an 11.4 per cent earnings growth in 2024 and a 14.4 per cent growth in 2025
  • Economic growth is slowing but remains healthy and above-trend. The US economy peaked in 3Q23, with real growth rising 4.9 per cent q-o-q, SAAR. S&P 500 revenues are forecasted to rise 5.0 per cent in 2024 and accelerate to 5.9 per cent in 2025. Inflation (PCE deflator) has slowed from 7.1 per cent in June 2022 to 2.7 per cent in March 2024. Wage gains have slowed from 8.0 per cent in April 2020 to 3.9 per cent in April 2024. Healthy margins remain intact
  • Market expectations for a Fed rate cut have been reduced since the beginning of the year from seven rate cuts to one this year. Once the Fed begins to cut the Fed funds rate, it should be quite accretive to earnings. For the next 12 months, FactSet reported that analyst price estimates suggest a 13 per cent increase in price for the S&P 500 from current levels
  • US equities have surpassed all-time highs while the economy and inflation are broadly expected to slow. While many cyclical drivers of economic growth are showing limited signs of strain, the tailwinds provided by secular themes like the technology revolution, innovation in healthcare and other sectors, near/onshoring, and the re-industrialisation of the US should boost economic activity, maintain margins, increase productivity, and most significantly, increase the return on invested capital

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