Stocks come into the new week with momentum on their side. The Dow Jones Industrial Average closed at a record on Friday, capping off a 1.6% gain for the week. The S & P 500 also reached an all-time high last week and posted a weekly advance of 1.4%. That performance comes on the back of a half percentage point rate cut from the Federal Reserve. The reduction surprised many traders who expected a smaller quarter-point decrease. However, it’s not all clear for stock investors yet. There are still several headwinds that could thwart the market’s momentum. Here’s a look: Valuations The S & P 500 trading near record highs is a double-edged sword, as valuations are also at historically high levels. “Our most generous stress test for 2024 continues to suggest valuations are full,” wrote Lori Calvasina, head of global equity strategy at RBC Capital Markets. “The S & P 500 is already trading a little above where it deserves to at year-end 2024.” The broad market index is trading at 21 times forward earnings, near the highest levels of 2024. Scott Chronert of Citi also noted that six of the 11 S & P 500 sectors have “valuation composites near/at top decile levels.” “Neutral to negative valuation reads mean the index needs solid macro data, supportive rates (combined a soft landing), and improving fundamentals to drive further gains from current levels,” the bank’s U.S. equity strategist wrote. “Essentially, broader gains get incrementally more difficult given this backdrop.” Seasonality Investors also have to watch out for seasonality. BTIG’s Jonathan Krinsky pointed out that this is “the worst seasonal stretch of the year,” adding that it doesn’t end until mid-October. The S & P 500 has averaged a 2.3% loss in September over the past 10 years, according to FactSet data. October has been better for stocks in that time, with an average gain of 1.6%. However, some of the biggest sell-offs on record have taken place during that month — including the 1987 Black Monday crash that sent the S & P 500 down by more than 20% in one day. Election uncertainty Wall Street also has to navigate an increasingly tight U.S. presidential election race. A new NBC News poll shows Vice President Kamala Harris leading nationally, while former President Donald Trump has an edge on issues such as the economy. “We anticipate the risk of rougher waters ahead of the November U.S. Presidential election, forcing investors to tack back and forth to progress,” wrote Piper Sandler technical strategist Craig Johnson. Silver lining? To be sure, investors may get a reprieve from these headwinds given this week will be relatively quiet in terms of macro data. The only major report due this week is the personal consumption expenditures price index, a closely followed inflation gauge by the Fed. “Absent a big surprise in PCE, we see no major macro data releases this week that could spook the market. Historically, quiet macro weeks have been the best weeks for stocks (median return +0.61% vs. a typical +0.38%. Quiet macro weeks consistently produced positive returns over the past 10 years,” wrote Bank of America derivatives strategist Gonzalo Asis. RBC’s Calvasina also noted that while valuations may be elevated at the moment, her models point to more upside in 2025. Citi’s Chronert also said the bank is not advising clients to rush and sell stocks despite the current valuations.
Here’s what could knock the stock market’s momentum
Sep 23, 2024
