Jobs Surge While Earnings Amalgamate
What happened last week?
- The S&P 500 rose 1.38%
- The Dow Jones gained 1.43%
- The Nasdaq jumped by 1.12%
In January, the economy added 353K jobs — the most in over a year — while the unemployment rate stayed at 3.7%.
This week, investors will focus on the 104 S&P 500 4Q23 earnings results scheduled to be released. So far, 230 S&P 500 firms have reported their results and 78% have topped consensus estimates with an average surprise of 7.1%.
3 Things to Know
Geopolitics Are Unlikely to Derail the Recovery in 2024 and 2025
Last year, investors were concerned about economic matters such the prospects of a recession, aggressive central bank tightening and the stickiness of inflation. This year attention has shifted to geopolitical risks that have clearly increased.
The question at hand is when and to what degree may geopolitical events affect markets?
Stock and bond markets reflect discounts associated with potential calamities on a probability weighted basis. But one cannot discern the discount assigned to any one event.
Beyond US politics, the recent rise in the number and severity of geopolitical events, has investors concerned: Russia’s continuing war with Ukraine, the Israeli-Hamas conflict in Gaza and Houthi attacks in the Red Sea, as well as the persistent and now more deadly attacks on US servicemembers in the Middle East.
The issue of a further escalation leading to a war involving the US and Iran is often raised as a possibility.
A study of past geopolitical and military incidents since 1941 reveals that most events have only had a limited impact on markets. The few exceptions, Pearl Harbor, and the Arab Oil Embargo, significantly altered the path of the economy.
Present geopolitical tensions shouldn’t prevent corporate profits from rising in 2024-2025. So far, the events in the Middle East have impacted shipping costs, but not end prices, indicating that supply chains have been able to compensate for the disruption.
Broadly, Valuations Aren’t Too High
In short, when we look beyond the stocks that rallied on the “AI” excitement, we see reasonable valuations in a broad set of companies poised to potentially benefit as the US and global economies grow, the Fed lowers interest rates and corporate earnings rise.
The other question: How can earnings go up when the economy is slowing is best answered by looking at growth. The Fed is expected to lower rates in 2024 and as this happens, it should lift the economy into 2025.
We look for 1.6% US GDP growth in 2024 followed by 2.6% in 2025. While the pace of inflation and job growth could alter the Fed’s path, we currently see the Fed lowering rates in five 0.25% steps this year, starting in May.
As the economy grows, earnings should also grow. In fact, S&P 500 earnings have grown in 12 of the past 14 years through 2022, our last year of complete data.
Markets Are Likely to Go Up No Matter Who Wins in the US
The Road to the White House currently looks like a rematch between President Joe Biden and former President Donald Trump. Neither has high approval ratings and the election is likely to come down to several swing states, as it has in the past two election cycles.
Investors would be wise to see the difference between “the news” as they consume it and “the economy” as it is. Only if there is a major geopolitical event or a radical change in policy after the US elections might there be a negative tilt in economic activity.
Meanwhile, this phase of normalization and growth, of resilience and reshoring will continue, driving future corporate profits and markets higher.
Lastly, linked to the how November plays out are US government debt levels. The marketable debt-to-GDP ratio stands at 94.6% currently versus 30.7% at the end of 2007, according to the Congressional Budget Office.
For investors, the size of the national debt does not present immediate challenges for financial markets and there is no immediate US debt or deficit crisis and there is unlikely to be one for years to come.
The US has significant borrowing capacity and has an ample supply of Treasury buyers. Further, the US is no longer facing a challenge from China’s yuan becoming a reserve currency.
Nonetheless, the politics associated with debt and deficits will be featured prominently this coming November.
See our weekly CIO Strategy Bulletin for more details