Has the stock rally has resumed its course

Mon Jan 20 2025
Ramesh Sridharan (940 articles)
Has the stock rally has resumed its course

The stock rally has regained its momentum. The recollections of 2022 persist.  Investors must assess the sustainability of the stock rally in light of corporate earnings performance. In the lead-up to Donald Trump’s presidential inauguration, stocks experienced a notable resurgence. However, a degree of apprehension persists among investors, as the specter of 2022 continues to cast a long shadow over the markets this year.

The S&P 500 index and the Dow Jones Industrial Average recorded their strongest weekly performance since early November, following Wednesday’s consumer inflation report, which indicated a moderation in underlying price pressures. Investors, having largely braced for an underwhelming report, reignited the struggling stock rally. The yield on the benchmark 10-year Treasury note declined, concluding the week at 4.61%.

The recent rally has restored stocks to positive territory for 2025; however, a number of analysts and investors express concern that this respite may be short-lived. The impending return of Trump to the Oval Office on Monday raises concerns that his proposed hefty tariffs and mass deportations could reignite inflationary pressures. “The specter of elevated inflation looms prominently in our consciousness, leading us to envision a recurrence of the events of 2022,” remarked Callie Cox, chief market strategist at Ritholtz Wealth Management. “The impact of inflation remains palpable.”

In 2022, both stocks and bonds experienced a decline as the Federal Reserve embarked on a series of aggressive interest rate hikes aimed at curbing persistent inflationary pressures. The significant losses left traders with limited options, until the surge in interest surrounding artificial intelligence propelled stocks into a bull market the subsequent year. Investors are increasingly anxious that Trump’s proposed agenda, along with various government policies, may trigger another rise in bond yields, potentially leading to a renewed decline in stock prices. Rising yields constrained stock returns for a significant portion of the previous month. Equities began their descent in mid-December as the Federal Reserve indicated a more measured stance regarding future interest rate reductions.

Investors express apprehension regarding the escalating government deficits that may arise from potential tax reductions. Increased deficits necessitate that the Treasury Department issue additional debt, which can lead to a depreciation in the value of existing bonds due to heightened supply. When yields decline, bond prices experience an upward movement. Investors are set to scrutinize a strong lineup of earnings reports this week from companies such as Netflix, Procter & Gamble, and American Express, as they seek to determine if corporate profits can sustain the ongoing stock market rally.

The fervor among retail investors has recently diminished. The latest survey from the American Association of Individual Investors indicates that optimism regarding stock performance over the next six months has declined, reaching its lowest point since November 2023. Kevin Gordon, senior investment strategist at Charles Schwab, remarked that we anticipate “significantly increased index-level volatility, primarily influenced by policy developments emerging from Washington.” “This will undoubtedly serve as the distinguishing factor for 2025 compared to 2024.”

In recent weeks, the shares of major technology firms have experienced a notable decline, undermining a key support of the remarkable rally observed over the past two years. The Magnificent Seven—Alphabet, Amazon.com, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla—have collectively lost approximately $620 billion in market value over the last month. Equities may exhibit heightened sensitivity to increasing yields at this juncture, given that they have already appeared costly when assessed against historical benchmarks. The S&P 500 is currently valued at 22 times its anticipated earnings for the forthcoming year, surpassing its decade-long average of 18.5 times.

Concerns among investors are mounting regarding an increase in benchmark yields, which influence borrowing costs for essential expenditures like housing and education. This development may exacerbate financial strain for cash-strapped Americans and challenge the robustness of the economy. Recent data indicate that the economy continues to exhibit robust stability. Some investors suggest that this development is favorable for stocks in the long run, even if it coincides with an increase in yields.

“Historically, there have been numerous instances where increasing interest rates have not adversely affected stock performance,” stated Shana Sissel, chief executive at Banrion Capital Management. “If the economy can thrive in a higher interest rate environment, what rationale do we have for believing that this will not be beneficial for equities?” The December jobs report delivered a striking surprise, with hiring activity exceeding forecasts, suggesting that the labor market remains robust and may be gathering momentum.

JPMorgan Chase has announced a remarkable 50% increase in net income for its latest quarter, while Goldman Sachs has seen its profits more than double. Executives indicated that large corporate clients are eager for capital to support substantial investments. Businesses have commenced the year with a renewed surge of transactions. JCPenney has announced its merger with Sparc Group, the parent company of notable brands including Brooks Brothers and Eddie Bauer. Getty Images Holdings and Shutterstock are merging to create a company valued at $3.7 billion. Constellation Energy has reached an agreement to acquire power company Calpine for a sum of $16.4 billion. “The necessity for the Fed to adopt an aggressive stance in rate cuts has diminished.” “That feels just right,” remarked Mark Hackett, chief market strategist at Nationwide.

Ramesh Sridharan

Ramesh Sridharan

Ramesh Sridharan is our Stock Market Correspondent covering events and daily movements of stock markets in Asia. He is based in Mumbai