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Do Not Fear... The Bull Market Is Here (To Stay)

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As the stock market surges to record highs practically daily, investors face a crucial question: is this the beginning of an extended bull market? I would say that the answer is a resounding yes.

Despite the noise of geopolitical tensions and economic uncertainties, the fundamentals are rock-solid. A resilient economy, impressive earnings growth, and transformative advancements in AI are setting the stage for sustained upward momentum.

Furthermore, anticipated monetary expansion and hefty fiscal deficit spending are further buoying the market and economy. This isn't a fleeting moment, but a powerful trend backed by robust evidence.

Let's dive into the factors driving this bullish momentum and talk about a few powerful methods for identifying the leading sectors and picking winning stocks.

1) Resilient Economy

The strength of the US economy continues to surprise to the upside, with the labor market remaining persistently strong, and GDP growing above trend. Estimates from the Federal Reserve Bank of Atlanta are currently for annual GDP growth of 3.1%.

Unemployment is also pinned to lower levels. Even after two years of extremely restrictive monetary policy the unemployment rate is still just 4.0%.

Analysts have unsuccessfully been forecasting rising unemployment for most of the last two years, and now that we are approaching expansionary policy it seems the dire rise may never come.

Furthermore, the US household balance sheets are as secure as they have been in decades. Mortgage payments as a percentage of disposable income are below 10%, the lowest level going back to 1980, and household wealth recently registered new all-time highs of $150 trillion.

Excess disposable income, along with the wealth effect will continue to drive consumer spending, and comfortable household leverage significantly limits systemic risk.

2) Monetary Expansion on the Horizon

Liquidity is arguably the most important factor in leading stock returns.

The Federal Reserve is very close to changing their policy stance, with expectations shifting from high interest rates and restrictive monetary policy to cutting rates and increasing liquidity by year end. Lower rates will increase lending and spending, and likely power the stock market higher.

Although rate cutting policy has been delayed this year as high inflation persisted longer than expected, we are getting evidence that disinflation is taking hold.

When inflation rates were reported last week in the form of CPI, we saw that inflation had actually come in below forecasts, further encouraging market participants that price normalization was coming.

As long as inflation continues to trend down, we can expect the Fed to cut rates.

3) Impressive Earnings Growth

Along with liquidity, the other most important driver of stock market returns is earnings growth, and this market has it in spades.

For Q2 2024, S&P 500 earnings are projected to rise by +8.6% compared to the same period last year, driven by a +4.6% increase in revenues.

Most notably, the Tech sector stands out with an impressive +15.1% earnings growth for Q2, contributing significantly to the overall market performance. Remarkably, the “Magnificent 7” tech giants are expected to see a whopping +25.4% increase in earnings on +13% higher revenues.

While the Tech sector shines, several other sectors are also showing positive trends. The Medical sector anticipates +19.1% earnings growth, Energy is up +12% after several quarters of decline, and Consumer Discretionary and Finance sectors expect +10.2% and +9.6% growth, respectively.

For the full year 2024, S&P 500 earnings are projected to grow by +9.2%, recovering from last year’s modest decline.

Altogether, this data reflects a continued resilience in and shows why investors can remain optimistic moving forward.

4) AI Revolution Charges Ahead

The explosion of Artificial Intelligence is profoundly bullish for the economy and stock market due to its transformative potential across various industries. Many experienced investors believe it will be as significant to markets as the proliferation of the internet was.

As artificial intelligence technologies continue to advance, they enhance productivity, efficiency, and innovation, driving economic growth. Companies deploying AI solutions can streamline operations, reduce costs, and gain a competitive edge, leading to higher profitability and shareholder returns.

Moreover, AI's ability to analyze vast amounts of data and generate actionable insights enables businesses to make more informed decisions, further fueling expansion and market performance.

The effect on productivity is especially notable.  In Q4 2023 the US Bureau of Labor Statistics productivity gains at 3.2%, well above the long-term average of 2.1% demonstrating the strong effects the technology is already having.

5) Fiscal Deficits Keep the Economy Buoyant

We covered monetary policy, but what about the fiscal side?

For better or worse the US government has been very liberal with spending and is running a significant deficit. And while I can sympathize with the fiscal hawks and their concern for excessive deficit spending, a lot of it is going to a good cause.

Between the Inflation Reduction Act and the Chips Act, there is a huge amount of money being injected into exciting and necessary infrastructure investments.

These legislative packages incentivize investment in clean energy infrastructure and domestic chip manufacturing, creating jobs and fostering innovation across these critical sectors. On the clean energy side, the investments in nuclear energy are especially exciting as the trend towards nuclear is really picking up and is extremely promising.

This focus on infrastructure not only strengthens national security but positions the US to cement its position as a leading energy producer globally, and paves the way for advancement in semiconductors, which are only growing in importance.

It also increases the country’s manufacturing abilities restoring some of the jobs that were lost during the period of globalization, likely resulting in economic optimism.

These investments will have far-reaching implications and should benefit many sectors of the economy.

Continued . . .


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Remaining Cognizant of the Risks

I would be remiss to exclude potentially bearish catalysts. And though some are concern-worthy, they are mostly fleeting, and in my opinion, do not currently threaten the uptrend.

The primary risk to this bull market is inflation. If there is a marked increase in the rate of inflation, there could be more challenging market action that has to play out. However, with the most recent data, which is quite encouraging I put the odds of another inflation spike very low.

Another headline risk is the Geopolitical activities like those currently playing out in the Middle East. However, while tragic in many ways these things usually have limited influence on markets after the initiation of conflict.

Finally, as for the Presidential election, although it seems uncertain, there is little evidence that either candidate will be bearish for the stock market. Historically, there is some volatility leading up to the event, but it is usually followed by a settling down of anxieties, and the presidential election cycle suggests that the year following elections is also bullish.

Sectors and Stocks to Focus On

There are of course many ways to go about picking stocks, but sticking to a process is probably the best way to have success.

For me, there are a few fundamental techniques that aid in profitable trading.

Firstly, focus on sectors that are leading the market. The leading sectors usually have some economic factors driving them higher. As discussed here, the AI boom, and government spending are major trends moving the market.

Technology stocks like the “Magnificent Seven” benefit from the trend in AI, as well as other semiconductor stocks and ancillary industries like data centers. As far as fiscal spending, we know the nuclear energy industry is going to see a big boost in the coming years, and stocks in that sector have been very strong.

Secondly, identify the stocks in the leading sectors that are showing relative strength. Some investors buy the laggards hoping to pick out undervalued stocks, but those making new highs are usually the ones that continue higher thanks to momentum.

Leaders lead for a reason, usually because they are the fastest growing and most critical to a trend. Don’t over complicate this part.

Finally, use the Zacks Rank to filter for stocks with increased odds of rallying in the near-term.

I have been continuously impressed by the Zacks Rank’s ability to identify winning stocks. Over the last year it has been spot on in picking the biggest winners like Nvidia, Alphabet, and Arista Networks and offers up new investment ideas daily.

By aggregating all the analysts’ earnings revisions on each stock, the Zacks Rank provides a score and identifies those most likely to rally. Focus on stocks with Zacks Rank #1 and #2 as they have the strongest earnings revision trends.

That’s it! Focus on the best stocks in the best sectors and use the Zacks Rank to filter for stocks with growing earnings estimates.

What Could Be Even Easier?

Stay with me for another moment. Many of the trends that have carried the market higher over the last year are still very relevant today and are likely in the early innings. The bullish factors have years of runway, while the bearish ones are mostly transient.

The US stock market has an epic history of climbing the wall of worry so don’t miss out on this powerful bull market.

Putting It All Together

Over the last 12 to 24 months, inflation has eased significantly. And with interest rate cuts likely just a few months away, and better-than-expected earnings, our resilient economy is presenting fantastic opportunities for investors.

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Ethan Feller

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