Weekly Market Brief: December 11, 2023

The S&P 500 rose for the sixth straight week and on Friday closed at its highest level since April 2022. The benchmark stock index has gained just shy of 20% for the year. Other assets didn’t fare quite so well. The US Dollar index erased the prior 2 weeks of declines, and that helped to drive the prices for gold and oil each down more than 3%. Gold is still far into positive territory for the year, but crude oil’s seventh straight week of declines pushed it near year-to-date lows.

It’s Fed week.

There’s virtually no chance the FOMC hikes interest rates on Wednesday. With inflation continuing to moderate, the labor market softening, and slowing economic activity around the world, the consensus view is that the federal funds rate peaked in July. A lack of rate changes doesn’t mean the results won’t be worth watching, though. Each quarter, the members of the central bank’s policy-setting committee publish a Summary of Economic Projections (SEP) that details their opinions about the coming years. This week’s edition should give us a clear indication about how the Fed is thinking about rate cuts in 2024. Futures markets are pricing in 4 cuts by the end of the year.

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 20x (a level previously seen only during the late-1990s) to 15x (a level in-line with historical averages).

This year was the opposite experience: stock prices are up, but earnings are not. Profits began to stabilize in the most recent quarter after 3 consecutive periods of declines, but earnings projections for next year have started to deteriorate. With the market’s rebound over the last few weeks, valuations have climbed to roughly 19x next year’s earnings. That’s far from cheap when compared to historical norms.

What’s Ahead

Here’s the economic calendar for the week ahead