Stock Market Rally Bolstered by Steadfast Fundamentals

Wall Street continues to demonstrate resilience, with both the S&P 500 and Nasdaq Composite indexes concluding the week on a positive note, marking the third consecutive week of gains. Investors are witnessing an ongoing streak of successes for these indexes, with the S&P 500 rising 2.2% and the Nasdaq Composite edging up by 2.4% over the past week. Remarkably, since the termination of October, the S&P 500 has ascended by 10%, while the Nasdaq Composite has climbed an impressive 13%.

Decompression of Inflation Fears

Recently, concerns over inflation have been alleviated, supported by significant dips in both commodity prices and interest rates. Notably, oil prices have dwindled by 20% since September's end, while natural gas has seen a 19% decrease subsequent to October's close. Meanwhile, yields on 10-year notes have fallen 57 basis points to 4.44%, with a 37 basis point drop to 4.83% in two-year yields since mid-October peak levels. This downtrend in interest rates can be largely attributed to a series of surprisingly weak economic data.

Positive Outcomes in the Labor and Political Arenas

On the labor front, the United Auto Workers have made headway, signaling the impending conclusion of strikes against the automakers after gears shifted towards supporting new contracts. Concurrently, political strife has been momentarily quelled with Congress and the White House reaching an agreement to sustain government operations well into the upcoming year, mitigating the risk of exacerbated unemployment rates due to potential governmental standstill.

Earnings Surpass Expectations

An analysis by FactSet reveals promising insights, with 82% of companies within the S&P 500 surpassing their earnings estimates—a statistic that stands taller than the decade average. The earnings growth rate is reported at 4.3% in a year-over-year comparison. Anticipating future guidance, a minority of companies have issued negative forecasts, while an encouraging number have presented positive outlooks.

Valuation Metrics Offer a Green Light

When examining the current 12-month forward price-to-earnings ratio for the S&P 500, it is slightly under its five-year average by resting at 18.6. This relatively lower ratio hints that the rising equity markets are well-supported by underlying business performance, suggesting potential leeway for further growth.

Encouraging Inflation and Earnings Trends

Inflation forecasts have turned optimistic with commodities linked to inflation seeing notable reductions. Furthermore, earnings calls have become less preoccupied with inflation, marking the lowest mention frequency since the second quarter of 2021. Talks of recession have also been diminishing over the last five quarters.

The Bigger Economic Picture

The current upward momentum in the stock market seems grounded in solid fundamentals. Inflation is being tamed and a 'soft landing' for the economy may have been successfully engineered. Major threats such as extended strikes and potential government shutdowns have been successfully navigated, at least for now.

Caution Amid the Optimism

Despite the upbeat climate, the unpredictability of markets calls for investors to maintain their established, prudent investment strategies. Historical trends remind us that excessive confidence can be as detrimental as panic.

Market Watch and Holiday Greetings

As US futures display calm and the Japanese stock market celebrates a 33-year peak, investors might observe a deceleration in market activity as earnings reports wind down and the holiday season approaches. An impending holiday gives us reason to take a break, reconnect with loved ones, and engage in festive traditions, embodying the spirit of gratitude and celebration. Here's to a Happy Thanksgiving and a revitalizing holiday break.

stocks, inflation, earnings