The four reasons I remain constructive on stocks
Over the past few years, I have consistently remained "constructive" on stocks. And readers who've followed my advice have been well rewarded...
The S&P 500 Index and the tech-heavy Nasdaq Composite Index both hit all-time highs yesterday. And they're looking to extend their gains today.
I've cited four reasons for my outlook: The economy is strong, corporate profits are booming, inflation is muted, and the Federal Reserve will likely start cutting rates.
So let's look at each of these reasons...
1) On July 30, I reviewed the Commerce Department's second-quarter advance estimates for U.S. GDP.
The report showed 3% growth for the quarter, exceeding estimates of 2.3%. And I concluded that "the U.S. economy is still remarkably resilient."
I continue to believe so. As stocks continue to rise, the economy should have the strength to support these higher prices. (Though as I've noted before, watch for high valuations.)
2) Meanwhile, corporate earnings are booming. They're up 11% year over year and are expected to reach a record high. You can see it in this chart courtesy of Charlie Bilello on social platform X:
In fact, according to the Kobeissi Letter, around 63% of companies in the S&P 500 beat earnings expectations in the most recent quarter. That's the highest percentage in four years and beats the long-term average.
Here's the chart from the X post, showing the frequency of earnings beats and misses:
According to the post, "Excluding the post-pandemic recovery, this marks the best quarter in at least 25 years." This shows that earnings momentum is very strong, which reinforces my constructive view.
3) Inflation remains muted, as reflected in yesterday's report from the Bureau of Labor Statistics. The Consumer Price Index ("CPI") rose a mere 2.7% year over year and 0.2% from the previous month.
However, "core CPI" rose 3.1% year over year and 0.3% from the previous month. That marked the highest level in five months. (Core CPI is a widely watched measure that strips out volatile food and energy prices.)
You can see the CPI and core CPI in this long-term chart from the New York Times:
According to the article, the numbers suggest "the central bank can move ahead with plans to soon restart interest rate cuts that it put on hold in December." And that brings me to my final reason...
4) The Fed is likely to cut its benchmark interest rate by 25 basis points ("bps") at its upcoming September meeting. That should provide a boost to both the economy and stocks.
Real-money bettors on Polymarket think the Fed is 80% likely to cut rates by 25 bps. And they think there's a 7% chance of an even larger cut of 50 bps.
So, with all four of these metrics doing so well, is it time to pile into stocks? (Or is it time to buy every dip, as this Wall Street Journal article notes so many investors are doing?)
In a word, no.
As I wrote on July 25, "I'm becoming more cautious... not because I'm predicting economic calamity, but simply due to valuation."
In that e-mail, I shared charts of two different measures for the S&P 500. The first one shows its earnings multiple:
And the second shows its cyclically adjusted price-to-earnings ("CAPE") ratio:
Both charts show that stocks are close to the most expensive they've ever been. But I concluded:
To be clear, unlike late 1999 and early 2000, I do not think we're in outright bubble territory when it comes to valuations. (And I don't believe, as I did starting in early 2008, that we're on the verge of an economic crisis.)
But as I've been saying all year, as stocks continue to rise, you should temper your expectations for future returns.
My view hasn't changed since then, and I still remain constructive on stocks.
Best regards,
Whitney
P.S. I welcome your feedback – send me an e-mail by clicking here.