Stocks Continue Run Backed By Solid Fundamentals

Key Takeaways

• Nasdaq Composite Up 13% Since October
• Oil Down 20% Since September
• Japanese Stocks Hit 33 Year High

Both the S&P 500 and Nasdaq Composite closed higher for the 3^rd week in a row on Friday. The S&P has been up for thirteen of the past fifteen weeks, gaining 2.2% while the Nasdaq was up 2.4% for the week. That puts both the S&P and Nasdaq up 10% and 13% respectively since the end of October. The velocity of the gains has been remarkable, and we are now just 2% of the highs for the year.

Worries over inflation appear to be subsiding as both commodity prices and interest rates are down substantially of late. Oil is down 20% since the end of September and Natural Gas is off 19% since the end of October. At the same time, the yield on the 10-year note is down 57 basis points to 4.44% and the two-year is down 37 basis points at 4.83% since hitting highs in mid-October. Weaker than forecast economic data has largely driven the drop in interest rates. But I’ll also note, despite the economic data being lower than expected, growth is positive, relieving fears of a recession.

We also have good news concerning the United Auto Workers as their strikes with automakers appear set to end after workers backed new contracts. Also, Congress and the White House managed to pass a bill that will keep the government running until at least early next year. Both the strike and possible shutdown could have led to a massive uptick in unemployment rates.

There is also good news on the earnings front. According to FactSet, with 94% of the S&P 500 having reported, there are some very interesting takeaways. 82% of companies beat their earnings expectations. The growth rate for earnings appears to be 4.3% year-over-year. The number and magnitude of earnings surprises is above the 10-year average. And looking forward, just 64 companies issued negative guidance. 32 companies issued positive guidance.

The forward 12-month price-to-earnings ratio for the S&P 500 is now 18.6, slightly below its 5 year average of 18.8. That means the gains we’re seeing in equities is supported by the fundamentals. In fact, one could even interpret the numbers as markets having slightly more room to run.

Another encouraging sign with respect to earnings is inflation expectations. As I mentioned above, we’ve seen a precipitous drop in certain commodities that could stoke inflation. We’re also hearing less concern from companies about inflation. The number of times inflation has been mentioned during earnings calls is at its lowest level since 2Q of 2021. For the past five quarters, inflation has been mentioned fewer and fewer times. Related to that, we’ve also had five consecutive quarters of fewer mentions of a recession.

So, what does all this mean? Well, I’d characterize it by saying the rally we’re seeing has substance. Equity prices are moving higher backed by fundamental support. Inflation appears under control. Give credit to Jerome Powell and company because, for now at least, they have pulled off the “soft landing” not many economists thought was possible. Major potential obstacles to the economy in the form of a prolonged autoworker strike and government shutdown appear to have been averted (thought the government shutdown will certainly be an issue in January again).

A word of caution though. Markets have a unique way of keeping investors honest and it’s not uncommon to see them do something unexpected. Therefore, I wouldn’t be pushing all my chips in. I would continue sticking with the investing strategy and plans that got you this far. As the saying goes, bulls make money, bears make money, pigs get slaughtered.

Taking a quick look at today, U.S. futures are quiet in premarket trading. Overnight the Japanese market hit its highest level in thirty-three years. Finally, oil is higher by nearly 2%. I expect volume will slow as the week progresses; however, there are a couple of bigger names reporting earnings, including Nvidia after the close on Tuesday and Deere before the open on Wednesday.

I’ll be taking the rest of the week off, so I just want to take a second and wish everyone a Happy Thanksgiving. I love this holiday because there are no expectations other than to eat and watch football; two areas in which I thrive. There are no gifts, no last second shopping. This is just a time to be with friends and family and enjoy one another’s company (or at least tolerate one another). Have a great holiday and I’ll be back next Monday.

tastytrade, Inc. commentary for educational purposes only. This content is not, nor is intended to be, trading or investment advice or a recommendation that any investment product or strategy is suitable for any person.