Equity Markets – Post-election Rally Takes a Breather
Equity markets fell during the week, taking a break from the rally post-election. The S&P 500 Index fell 1.1%, while the NASDAQ Composite slipped 1.4%. The Magnificent 7 performed relatively better, falling only 0.8%. Small caps fell 1.3% for the week. Bond indices were flat during the week.
Investors are processing several moving pieces, including potential growth in certain stocks with regards to the incoming new administration in the White House. Additionally, recent increasing conflict between Russia and Ukraine have given concerns to the market as investors consider safe haven assets. Markets are also trading at lofty valuations, which has been exacerbated during the post-election rally.
Housing Weakens, While Retail Sales Remain Strong
The real estate segment of the economy is currently showing some weakness as housing starts and building permits for the month of October came in weaker than expected. While recent hurricane activity may have impacted construction to some degree, the recent spike in mortgage rates also have led to home builders exhibiting cautiousness.
Relatively high inflation continues to linger with the Producer Price Index for October coming in higher than September (2.4% versus 1.9% for the year-over-year metric). Increases in airline fares and services prices were a key contributor to the increase.
Despite ongoing relatively higher prices, retail sales for October came in higher than expected, rising by 0.4% from the previous month. Specifically, sales of motor vehicles and electronics were a key contributor to the higher-than-expected economic release.
Third Quarter Earnings Results Coming in Fairly Solid
Third quarter earnings season is winding down, with results coming in fairly solid. Year-over-year earnings growth for the third quarter is forecasted to be 8.8%, with over 90% of companies in the S&P 500 posting results. Approximately 75% of companies beat analysts’ earnings expectations, with just under 20% coming in below earnings expectations. The Information Technology and Communication Services sectors led the way regarding year-over-year earnings growth, with the laggard being the Energy sector as the price of oil continues to languish.
Large cap stocks continue to trade at the high end of their historic price-to-earnings (P/E) range as investors have been willing to pay a premium for expected earnings growth. However, on a price/earnings to growth (PEG) multiple, stocks are trading in the mid-range of this metric and look fairly valued given the prospective earnings growth.
The S&P 500 is expected to achieve 10% year-over-year earnings growth for 2024 and 14.1% earnings growth for 2025 with the Information Technology and Communication Services sectors expected to provide leadership.
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Sources: BTC Capital Management, S&P Dow Jones Indices, IHS Markit, FactSet
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