The S&P 500 Index, a benchmark for the broader market performance, has been on a tear this year. This rally can be attributed to a few key factors: inflation’s downward trajectory, allowing the Federal Reserve to cut interest rates; a resilient economy; and robust corporate profit growth. With the year nearing its end, everyone is wondering if this upward trend, which began with the bear market bottom in October 2022, will continue.
The market’s recovery began after the post-COVID-19 inflation surge sent markets plummeting in 2022. The launch of OpenAI’s ChatGPT, a powerful chatbot powered by large language models, and the decline in inflation from its June 2022 peak of 9.1% (a result of the Fed’s aggressive rate hikes) helped restore market confidence. The SPDR S&P 500 ETF Trust (SPY), an exchange-traded fund tracking the S&P 500 Index, has gained approximately 65% since hitting its low point of $346.35 on October 12, 2022. This year alone, the ETF has surged nearly 21%.
Wall Street’s year-end estimates for the S&P 500 Index vary widely, ranging from 4,200 to 6,100, according to data shared by TrendSpider. The highest estimate comes from BMO Capital Markets, while JPMorgan holds the lowest. Notably, the current price of the S&P 500 Index has already surpassed the majority of these predictions.
Financial data provider FactSet recently reported that the trailing 12-month price/earnings ratio for the S&P 500 Index is 26.7. This is significantly higher than the 5-year average of 23.7 and the 10-year average of 21.7. This suggests that the market may be priced at a premium, potentially indicating a risk of a correction.
With the rate cut announced last week and two more 25 basis-point cuts anticipated this year, analysts are predicting a broader market rally. They expect small-cap and rate-sensitive stocks to gain momentum after lagging behind for a while. The mega-caps that have led the rally so far are also expected to hold up. However, uncertainty will likely persist until the outcome of the November 5th election is known. Despite this, the market could capitalize on the seasonal strength typically observed in the final few weeks of the year.
JPMorgan Global Investment Strategist Sarah Stillpass highlighted in a report that the September rate cut could be a positive sign for equities. She noted that since 1980, five of the 10 best years for the S&P 500 occurred when the Fed was cutting rates without triggering a recession. Additionally, Stillpass pointed out that the Fed has cut rates 12 times when the S&P 500 was within 1% of its all-time high, as is the case this year. In all 12 instances, the market was higher one year later, with a median return of 15%.
In pre-market trading on Monday, the SPY edged up 0.08% to $568.69, according to Benzinga Pro data. The continued upward trend suggests that investors are cautiously optimistic about the market’s future despite the ongoing uncertainties.
