Three reasons bulls should be stoic in the face of legitimate stock-market worries

By Jamie Chisholm

Critical information for the U.S. trading day

Early futures action on Monday suggests the S&P 500 may struggle to record its 35th record close of the year. Still, traders are used to the stock market initially displaying a cautious tone that morphs into a bullish drive as a session progresses.

However, it tends to be the usual mega-tech suspects that do the driving.

And that market narrowness is just one of the issues that Ed Yardeni, chief investment strategist at Yardeni Research, says are challenging a bull market that has been running since Oct. 2022.

"According to the naysayers, earnings growth expectations are too high because there are mounting signs of an economic slowdown. The breadth of the stock market rally continues to narrow, which may mean that the bull market's fundamental support is weakening," says Yardeni, in an update posted over the weekend.

There's also the possibility that if the Federal Reserve was to avert a possible recession by lowering interest rates, then stocks could surge. But with valuations already stretched "any blowoff rally could set the stage for a severe selloff," he adds.

These are all legitimate concerns, says Yardeni. But he offers three important reasons why investors should be less worried.

First, the earnings outlook. The second-quarter earnings parade will kick off on Friday when the big banks such as JPMorgan (JPM), Citigroup (C) and Wells Fargo (WFC) present their results - and the season should go well.

As the chart below shows, by last week analysts were forecasting average S&P 500 earnings per share for this year and next of $261.74 a new record high.

"This all assumes - as we do - that a recession is unlikely anytime soon, especially since the Fed will lower interest rates to avert one if necessary," says Yardeni.

Next, better earnings, that are more widespread, will drive an improvement in stock-market breadth. "The percent of S&P 500 companies with positive three-month percent changes in forward earnings rose to a bull-market high of 83.0% during the July 5 week," Yardeni notes.

Incidentally, Yardeni points out that contrary to how it may feel, the S&P 500 excluding the Magnificent 7 of large technology stocks is up 36.4% since the start of the bull market. "So, the S&P 493 is in a bull market on its own."

Finally, there's market valuation. Yardeni accepts that the S&P 500's forward price to earnings measure of valuation is stretched, though that's largely attributable to the Magnificent 7.

So, while the market weighted S&P 500's forward P/E was 21.2 during June, the median forward P/E was just 17.8.

"In our opinion, the broad market is not overvalued, and could rise through the end of the decade on a combination of better earnings and a higher valuation multiple," Yardeni concludes.

Markets

U.S. stock-index futures (ES00) (NQ00) (YM00) are little changed as benchmark Treasury yields BX:TMUBMUSD10Y nudge higher. The dollar index DXY is a touch firmer, while oil prices (CL.1) dip and gold (GC00) is trading around $2,371 an ounce.

   Key asset performance                                                Last       5d      1m      YTD     1y 
   S&P 500                                                              5567.19    1.54%   4.00%   16.72%  26.19% 
   Nasdaq Composite                                                     18,352.76  2.77%   6.87%   22.26%  34.17% 
   10-year Treasury                                                     4.314      -15.30  -15.20  43.31   31.42 
   Gold                                                                 2381.2     1.68%   2.29%   14.93%  23.33% 
   Oil                                                                  82.31      -1.28%  5.22%   15.39%  12.43% 
   Data: MarketWatch. Treasury yields change expressed in basis points 

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The buzz

U.S. economic data due on Monday include the New York Fed's consumer inflation expectations survey at 11 a.m. Eastern, and consumer credit for May at 3 p.m.

Corning stock (GLW) is jumping more than 7% in premarket action after the specialty glass maker raised its second-quarter sales and profit guidance after a strong performance for its new optical connectivity products for Generative AI.

Shares of Boeing (BA) are up 0.5% after the plane maker pleaded guilty to a criminal fraud charge after the government determined the company violated an agreement that had protected it from prosecution for more than three years,

Paramount shares (PARA) are up nearly 5% after a special committee approved Skydance Media's buyout bid.

French stocks FR:PX1 and bonds BX:TMBMKFR-10Y slipped early on Monday after voters surprisingly rejected a far-right party that led in the first round of voting.

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-Jamie Chisholm

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07-08-24 0800ET

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