Daniela Sabin Hathorn, senior market analyst at the investment platform Capital.com, discussed the impact on the markets of Jerome Powell’s recent speech. On August 23, 2024, the Federal Reserve Chair indicated that the U.S. central bank would cut interest rates in mid-September. This upcoming rate announcement would be the last before the November 5 presidential elections.
In her commentary, a copy of which was sent to the Insurance Portal, Sabin Hathorn noted that the markets responded to Powell’s speech with renewed risk appetite. Her analysis, entitled Markets React to Powell Speech with 'Risk-On' Sentiment, was published on August 23.
"In his speech at the Jackson Hole Symposium on Friday, Powell confirmed a rate cut in September as the upside risks to inflation have diminished and further cooling in the labour market would be unwelcome," commented Sabin Hathorn.
"The Bank may want to correct its July mistake of keeping rates unchanged." — Daniela Sabin Hathorn
She added that markets reacted positively, with increased risk appetite for equities, accompanied by a strengthening in commodities and a weakening of the U.S. dollar.
The Jackson Hole Symposium, an international conference of central bankers organized by the Federal Reserve Bank of Kansas City, has been held every summer in Jackson Hole, Wyoming, since 1981. There are 12 Federal Reserve Banks in cities across the United States, including Boston, Chicago, New York, Philadelphia, and San Francisco. The Board of Governors, the federal body overseeing the Federal Reserve System, is based in Washington, D.C.
Course Correction
"Forget the Oscars. Earnings season around the world has been a spectacle.” — Capital Group
Sabin Hathorn also noted an increase in market expectations for a 50 basis point cut. The upper limit of the Federal Reserve's target rate range is currently 5.50 per cent (550 basis points). She explained that some traders took Jerome Powell's speech as "surprisingly dovish."
“The Bank may want to correct its July mistake of keeping rates unchanged at the meeting in September. With a lighter week on the calendar next week, momentum will likely depend on sentiment and how rate cut pricing evolves over the coming days," Sabin Hathorn suggested.
A blockbuster earnings season
At Capital Group, confidence in equities is high. In a market analysis entitled 5 reasons why equities could defy the odds, three Capital Group specialists contend that earnings growth will be the primary driver of stocks.
The authors – Maria Karahalis, Marc Nabi, and David Polak – are equity investment directors at Capital Group, with Karahalis also serving as a portfolio manager.
“Forget the Oscars. Earnings season around the world has been a spectacle," the authors write. According to them, U.S. corporate earnings for companies listed on the S&P 500 index appear poised for a rebound in 2024.
In a chart depicting earnings growth rates since Q1 2022, they outline two year-over-year comparison periods that reveal a turnaround. From Q2 2022 to Q1 2023, earnings trended downward.
However, Capital Group expects a recovery in earnings from Q1 to Q4 2023, based on actual data supplemented by their estimates.
“Companies in the S&P 500 grew earnings by 9.8% in the fourth quarter of 2023 year over year, and consensus estimates for 2024 suggest a sustained earnings rebound,” the analysis says.
The authors observe that 73 per cent of S&P 500 companies exceeded earnings expectations in Q4, while 63 per cent reported revenues higher than analysts' forecasts. This is according to LSEG Data & Analytics’ Institutional Brokers' Estimate System, a subsidiary of the London Stock Exchange Group and a provider of market data.
According to Capital Group, consensus analyst estimates for S&P 500 earnings forecast a gain of over 11 per cent in 2024, compared to 0.8 per cent in 2023. In emerging markets, consensus estimates project growth of nearly 18 per cent this year, compared to a decline of about 10 per cent in 2023.
The authors cite Chris Buchbinder, a portfolio manager at Capital Group, who states that "stocks will follow earnings, and earnings will follow fundamentals." Buchbinder, a portfolio manager for the Capital Group US Equity Fund (Canada), still sees relatively attractive opportunities in the market. However, he anticipates varied earnings performance among companies, "especially among tech favourites, with exceptional businesses and management teams differentiating themselves from the pack.”
Valuations not overblown
Upon examining the 10-year price-to-earnings ratio range for most sectors, the three Capital Group authors note that there is still some potential for appreciation. Despite their run-up, "U.S. equity valuations don’t appear stretched given growth expectations, especially when factoring in recent earnings strength," the analysis says, regarding valuations of a few S&P 500 sectors that might seem to be on the rich side.
“Earnings growth will be a key driver in determining if stocks continue moving higher, in contrast to the previous decade when multiple expansion and an ultra-low interest rate environment provided strong tailwinds,” the Capital Group authors state.
They add that the U.S. economic backdrop remains favorable, with a soft landing appearing more likely than a recession.
Concerns will stoke volatility
However, it is unlikely to be all smooth sailing, according to their analysis. “We expect some bouts of market volatility amid ongoing jitters around the pace and magnitude of interest rate cuts and inflation readings.”
They cite the higher-than-expected inflation figures in January 2024, which raised market concerns about when the Fed might begin cutting interest rates.
Nonetheless, they believe U.S. stocks should continue to find support "as long as earnings growth continues to meet or exceed expectations and the labour market remains strong.”
Established companies will be less buffeted by bad news, according to the Capital Group analysis. "Companies with clear earnings growth trajectories, pricing power, and the ability to maintain market share should be able to weather potential storms," the three authors conclude.
