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Weekly Market Brief: April 29, 2024

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After the three straight weeks of declines and the biggest selloff since last October, stocks rallied sharply last week. The NASDAQ Composite led the way, jumping 4.2%, and the S&P 500 rose 2.7%. Prices rallied in spite of weak economic data to end the week. The first estimate of Q1 GDP came in at a 1.6% annualized rate, a sharp slowdown from Q4’s 3.4% rate and nearly a full point lower than consensus expectations. On Friday, the bad news continued: the PCE Deflator, the Federal Reserve’s preferred measure of price inflation, accelerated to 2.7% year-over-year, the highest since October. Three-month annualized inflation, which tracks shorter-term trends in prices, was the highest in a year.

On Wednesday, we’ll get to see how Jerome Powell and his colleagues are thinking about the latest data release after their scheduled FOMC meeting. Hotter-than-expected inflation readings all but assure that the Fed won’t be cutting rates this week (and probably won’t be any time soon), but slowing GDP growth and the risk of recession is something Powell may address during the post-meeting press conference. Also be on the lookout for details regarding the wind-down of quantitative tightening.

Earnings Expectations and Valuation

The 2022 bear market decline was not driven by a deterioration in corporate earnings. Though stock prices dropped well over 20% from their peak to trough, expected future earnings remained stubbornly high. That divergence pushed the S&P 500 forward price-to-earnings ratio from more than 22x (a level previously seen only during the late-1990s) to 15x (a level in-line with historical averages).

Almost 18 months after that bear market reached its lows, and valuations are right back to where they were. The S&P 500 forward p/e ratio is above 20x.

Fortunately, profits are expected to grow at an annualized pace of about 10% over the next 3 years according to Bloomberg consensus estimates. That would help make current valuations easier to digest. There’s just one wrinkle. Expectations imply that S&P 500 profit margins will have to jump to the highest level in decades by 2025, and expand even more in 2026.

What’s Ahead

Here’s the economic calendar for the week ahead