Stock Rally May Thrive on Growth, Not Fed Cuts: S&P Nears Record

Key Takeaway

• Investors believe robust global economic growth can fuel a stock rally even without Federal Reserve rate cuts.
• Recent data shows US and global economies strengthening, with the IMF raising its global growth forecast.
• S&P 500 earnings are outperforming expectations, suggesting a positive outlook for stocks despite potential for zero rate cuts in 2024.

Global Growth Fuels Equity Rally

Despite the scaling back of expectations for Federal Reserve interest rate cuts, the S&P 500 Index has approached its record levels from March, suggesting that robust global economic growth may continue to support a record-breaking rally in equities. Investors are drawing parallels with the 1990s when equities surged despite high-interest rates, driven by strong economic growth. Zehrid Osmani, a Martin Currie fund manager, highlighted that a healthier-than-expected economy could underpin the equity market rally, suggesting that the recent pullback in equities might be a temporary blip rather than a sustained downturn.

Earnings Outperform Amid High Rates

The anticipation of Federal Reserve rate cuts has been significantly pared back from the start of the year, with traders now expecting fewer cuts as US inflation remains elevated. This adjustment in expectations comes amid a backdrop of rising geopolitical risks and election uncertainties. However, early results from the current reporting season show that about 81% of US companies are outperforming expectations, with first-quarter earnings projected to increase by 4.7% year-over-year. This outperformance, even in a high-rate environment, supports the view that the economy's underlying strength could sustain equity gains.

Secular Themes Driving US Economy

Jose Rasco, chief investment officer of the Americas at HSBC’s wealth division, identified four secular themes that could continue to propel the US economy forward: technology deflation, healthcare innovation, near-shoring, and the re-industrialization of the US. These drivers are expected to mitigate the impact of higher borrowing costs and support the economy's resilience against a potential downturn. Rasco's analysis suggests that these themes could help maintain growth above 1.7%, even as the Federal Reserve maintains elevated interest rates to combat inflation.

Street Views

• Zehrid Osmani, Martin Currie (Neutral on the market):

  "You have to assess why you could be in a scenario where there’s fewer rate cuts this year. If it’s related to an economy being healthier than expected, that could support the rally in equity markets after the typical volatile knee-jerk reactions."

• David Mazza, Roundhill Investments (Cautiously Optimistic on the market):

  "Net net, I’m still of the belief that we don’t need rate cuts to return to more bullish spirits, but I do think it’s going to be more of a grind."

• Brian Belski, BMO Capital Markets (Bullish on S&P 500 with higher yields):

  "This makes sense to us since lower rates can be reflective of sluggish economic growth, and vice versa."

• Andrew Slimmon, Morgan Stanley Investment Management (Bullish on equities for 2024 and 2025):

  "The earnings forecast could be even higher next year in the event of zero rate cuts in 2024... validates upside for equities."

• Ohsung Kwon, Bank of America Corp. strategist (Cautiously Optimistic on stocks given booming economy; Bearish if stagflation occurs):

  "If inflation is sticky because of momentum in the economy, that’s not necessarily bad for stocks. But stagflation is."