Five for Friday - July 12, 2024

Tech Bubbles, Employment, Consumer Spending, Profitability, and Bull Markets

1. Big Tech

Due to concentration in Big Tech stocks, stretched valuations, and the buzz around artificial intelligence, today’s market has drawn many comparisons to the late 1990s. That period featured a historic, tech-led bull market ended by a multi-year crash that saw the S&P 500 cut in half over several years. Most commentary seems to focus on the popping of the dot-com bubble (i.e., the big crash), but interestingly, even at the crash’s Oct. 2002 nadir, the stock market was still way higher than it was for the majority of the 1990s: from 1995 – 2002, the S&P 500 rose 119%, or a little over 10% a year (roughly the market’s long-term average). Despite the brutal crash, investors still realized a tremendous amount of value by being invested for the full cycle, and ultimately, from the advances in tech made during that period. Long-term investors also benefited greatly from exposure to non-Tech stocks once the bubble popped – an apt reminder for today’s AI frenzy.

2. Cooling

June was another month of softer labor market data, with private payroll growth missing expectations and the unemployment rate hitting a 31-month high. The Fed wants to see a cooling labor market so they can get comfortable with the idea that wage growth will not reaccelerate and spark more inflation. We are now moving past that point. The labor market has normalized after an idiosyncratic post-Covid period, and the economic risks now skew to the downside given the extent to which the strong job market fueled the consumer spending boom that’s propped up the U.S. economy. The market is now fully expecting two rate cuts by year-end, but a cooler economy might necessitate a more aggressive move.

3. Spending

We recently highlighted the durability of spending on experiences and travel even as the labor market cools. One reason for this seeming inconsistency might be the growing bifurcation in the consumer backdrop. That is to say, higher income individuals, who are responsible for the lion’s share of overall consumption in this country (see chart), are doing well. They’re more likely to own their own home (reaping the benefit of the skyrocketing home equity via higher prices) and now also have higher yielding savings vehicles in which to store excess cash. On the other hand, the lower income cohort, while having seen its net worth rise in recent years, is still more like to rent and be weighed upon by higher interest rates (via credit cards, etc.). In today’s economy, it’s possible that the aggregate view is obscuring a widening gap under the surface, an effect that has spillover impact into both individual stock performance and the political landscape.

4. Earnings

In our Mid-Year outlook, Strategas President Nicholas Bohnsack identified the corporate earnings backdrop as one of the more bullish market signposts today. The second quarter earnings season kicks off this week, and S&P 500 earnings are expected to grow 9% (y/y) in Q2, which would be the best quarter since early 2022. Earnings are expected to grow 11% in 2024 and 14% in 2025, and while those expectations will likely come down over time, the directional trend – higher – is bullish. Given that stocks are merely ownership shares of real companies whose primary value comes from the ability to make money and grow earnings, higher profits are a great thing – especially with valuations already elevated.

5. Bears

Since World War II, there have been 18 bear markets (including 4 selloffs that reached -19% but not quite -20%), with the most recent one concluding in October 2022. From bear market bottom until subsequent market peak (i.e., the market top preceding the next bear market), the average S&P 500 return has been 111% and the average length of the rally has been 1,311 days. Our current rally sits at 56% and 635 days, both almost perfect midpoints to the historical average. The market is not perfect by any means, but history argues that there’s plenty of room to run after 2022’s collapse.

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