The benchmark US share market index, the S&P 500, is up 17% year to date (to mid-July) – far exceeding expectations. Even more impressive, it is up 26% since its October 2022 low.
Source: Yahoo Finance
Indeed, it is worth noting that the S&P 500 is now at a level (4,505 at time of writing) above most of the year-end 2023 targets that Wall Street firms set back in December last year.
Source: Sam Ro, TKer
So what is driving the rally?
The US economy has been far more resilient than expected. Although interest rates have surged and will probably remain high for some time, falling inflation and the improving outlook for earnings certainly helps. Never mind the “imminent recession” that many predicted last year – and which still hasn’t arrived – the economy has been remarkably stable.
Currently, the consensus estimate is that S&P earnings will contract by 9% in the second quarter and then bottom in the third quarter of this year, before recovering in 2024. If that view pans out, then the rise in stocks and increase in price to earnings (P/E) that we have seen since last October could perhaps be justified, although it is hard to deny that segments of the market, such as Tech, look expensive.
While we are in the midst of a widely anticipated earnings recession, declines have been mild. Furthermore, most economic data being printed lately (e.g. inflation, jobs, consumer sentiment) have surprised on the upside. As is often the case, it appears that stocks are pricing in the future more so than the present or past.
Even though many Wall Street strategists have revised up their 2023 targets for the S&P 500, others expect the index to end lower by the end of the year. According to Bloomberg, the average strategist’s target implies a 6.6% decline in the S&P during the second half of the year. So where we end up at the end of December is anyone’s guess. But if, like me, you derive comfort from long term probabilities, then you would expect the index to be higher – simply because that is what it does most of the time.
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