Equities were up 5.2% in February, fueled by earnings reports that beat expectations and the continuation of the soft-landing narrative. The economy (i.e. the “real” economy as opposed to Wall Street) is performing better than expected by most measures. Equities reflect this. However, they are starting to feel a bit stretched on valuation, driven by the promise of “AI”.
Valuations can remain excessive for long periods, so this may go on for a while. It is also possible that earnings growth accelerates enough for stocks to “grow into their multiples”. This seems like the less likely scenario, but it could happen. Alternatively, any hint of a slowdown or mis-step by one of the large cap high-fliers is likely to result in a pullback as markets are close to pricing in perfection.
Bond yields rebounded 34 basis points to 4.25% during February after dipping at the end of January. Hotter than expected CPI inflation and a strong jobs report drove the move. Additionally, the futures market has cut expectations for the number of Fed 25 basis point rate cuts from 6 to 3 during 2024—reflecting the stronger-than-expected economic growth thus far this year.
At some point there is a risk that higher rates choke off the equities rally. We’re still a long way away from that, but if higher inflation remains persistent and the labor market stays strong, we could see expected rate cuts fall closer to zero. If we were to approach that level—and the 10 yr. US Treasury were to move higher—it could create a headwind for equities.
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This market commentary was written and produced by Stableford Capital, LLC. Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested in directly. The views stated in this letter are not necessarily the opinion of any other named entity and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results.
S&P 500 INDEX: The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure the performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
