Stocks Could Hit Their All-Time Highs

Stocks were swimming in sympathy earlier this year, stuck in a doom-and-gloom climate. But now that summer sunshine’s hit, they’re ready to hit the surf with their freshly chiseled forms. (Just don’t tell Jonah Hill.)

🕰 Recap

• Investors were down in the dumps back in January, before a couple of trends gave stocks a pick-me-up.
• At this point, US stock indexes are sitting pretty again, with whispers of all-time highs entering the discussion.
• And now that second-quarter earnings have kicked off this week, company forecasts could give investors clues about where to pitch their expectations for the coming months.

✍️ Connecting The Dots

Picture the scene: it’s gloomy January, you’re sharing a comforting, candlelit dinner with some friends, and you hint at the mere idea that US stock indexes might pull off all-time highs this year. You’re laughed out of the room. Well, now’s the time for a revenge rendezvous, because that’s exactly what some Wall Street pros are predicting now. Goldman Sachs recently revealed that its clients are wondering – for the first time this year – whether to expect those record highs imminently, and that’s a fair question. After all, the S&P 500 and tech-heavy Nasdaq 100 only need to notch another 6% gain before they can ring that victory bell.

So here’s how you explain what’s happened to your bewildered buddies. For starters, AI began hogging the limelight earlier this year, lighting a fire under heavy-hitting technology firms that make up a hefty chunk of those indexes – think Google-parent Alphabet and Microsoft. And for mains, remind your pals that stocks can be good investments when inflation’s running hot. That’s because firms can often pass increased costs onto their customers via higher prices and cut their own costs at the same time – a recipe for better-than-expected profit growth. And at the risk of sounding too smug, just drop in that investors flat out forgot about that during the bleak midwinter of runaway price rises, slowing economies, and sagging stock markets.

So far, though, that’s exactly what’s happened. Firms have flexed their pricing-power muscles and profit has exceeded expectations. So despite forecasts throwing out woe betides late last year, data analytics firm FactSet reckons the S&P 500 looks set to notch growing profit this year. That would be an impressive feat given all the crosswinds out there. And while there’s plenty that could still go wrong, one thing’s for sure: understanding how stocks function in different climates will set you and your friends up to be better-informed investors in the future.

🥡 Takeaways

1. There’s no telling when inflation will finally decide to make its long-awaited exit.

Now, let’s not forget that inflation’s been on a downward trend for nearly ten months now, and the world’s watching it inch closer to the door like an unwanted party guest. Some investors, then, now believe interest rates won’t need to go much higher from here. But a word of caution on that: with tight job markets and a fairly robust economy, inflation could still throw out nasty surprises in the coming months. Stock market sentiment can turn on a dime, remember, so it’s always worth staying on your toes.

2. Analysts have donned their most intensely rose-tinted glasses.

At the end of the day, markets don’t care about what’s happened – it’s what’s ahead that matters. And according to FactSet, previously pessimistic analysts are now sipping from half-full glasses. Forecasters are expecting revenue and profit growth to hit 5% and 12% in 2024 respectively, which would mirror the pre-pandemic days that we miss so very much. But because the jury’s still out on whether that’s actually achievable, investors should look for companies’ clues about future projections in the second-quarter earnings season.

🎯 Also On Our Radar

US inflation data turned up looking pretty cool on Wednesday, lifting the spirits of already refreshed investors. Headline consumer prices – including volatile food and energy prices – inched up a lower-than-expected 3% in June, not far off the Federal Reserve’s official 2% target.