Stocks just keep climbing higher, with the S&P 500 hitting a 45th record closing peak Friday at 5,815.
Strong earnings, resilient economic growth, falling inflation, and anticipation of more Federal Reserve interest rate cuts have sent the market higher.
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As for profits, analysts project S&P 500 earnings rose 4.1% in the third quarter, according to FactSet. While that’s down from 11.3% in the second quarter, it’s still a buoyant number.
Looking at the economy, it grew an annualized 3% in the second quarter. And the Atlanta Federal Reserve Bank’s forecasting model calls for 3.2% in the third quarter.
Equity bulls were heartened by the September jobs report, which showed that non-farm payrolls rose 254,000 in September, up from 159,000 in August. And the unemployment rate dipped to 4.1% from 4.2%.
After the jobs data, “markets can have confidence to maintain their recent euphoria and continue broadening out,” beyond mega-cap technology stocks, Lara Castleton, U.S. head of portfolio construction and strategy at Janus Henderson, wrote in a commentary.
Inflation, Fed Policy outlook
On the inflation front, consumer prices rose 2.4% in the 12 months through September. While that slightly exceeded economists’ forecasts, it’s down from 2.6% in August.
The Fed has a 2% target for inflation. Its favored inflation indicator, the personal consumption expenditures price index, was very close to that mark in August—2.2% year over year.
Related: Druckenmiller, Summers deliver blunt messages to Fed on interest rates
The central bank slashed interest rates by 50 basis points last month, and many experts say tame inflation will spur more reductions.
Interest-rate futures indicate a 90% chance the Fed will lower rates by 25 basis points at its next meeting in November, according to CEM FedWatch. (Futures show a 10% probability of no action).
But stock bears say the market is overvalued. As of Oct. 4, the S&P 500 traded at 21.4 times analysts’ earnings estimates for the next 12 months, FactSet says. That’s well above the five-year average of 19.5 and the 10-year average of 18.0.
Bill Gross’ thoughts on stocks
Retired investment legend Bill Gross sounds somewhat neutral on stocks. He was known as the bond king when he ran the Pimco Total Return bond fund from 1987 to 2014. At one point, it was the largest mutual fund in the world.
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“I think stock investors should continue to be at average personal % levels but in defensive, higher-yielding stocks and low levels of bonds,” Gross wrote in a commentary. He listed the pros and cons of the equity market.
Positives:
- “Job growth slowing but within normal historical ranges.
- China fiscal and monetary [stimulus].
- Artificial intelligence investment spending and potential productivity boost.
- Lower inflation close to the Fed’s target.
- Increased spending for wars.
- Momentum.
- Five- to 10-year Treasury yields that are 125 basis points lower since the April 2024 peak.”
Negatives:
- “Valuations … at significantly overbought levels.
- Warren Buffett’s high cash position warns of bumpy road ahead.” Buffett’s Berkshire Hathaway had cash and equivalents of $277 billion as of June 30.
- “Election: a victory by Kamala Harris augurs for possible Democratic congressional majorities and higher corporate taxes.
- Wars may stunt global growth.
- Deficits ‘forever’ may eventually require spending slowdown.” Gross is referring to the massive budget deficit -- $1.8 trillion in fiscal 2024, which ended Sept. 30.
Related: Veteran fund manager bluntly says why popular stock forecast is wrong
Bill Gross’ investment ideas
Gross offered several investment recommendations.
- Allete (ALE) , a utility that’s a candidate for a buyout and has a potential return of 10% for the next 12 months, he said.
- Oil and gas pipeline limited partnerships, with 8% tax-deferred yields.
- Annaly Capital Management (NLY) “A high-yielding mortgage REIT [real estate investment trust] with stable price moves in a subdued Treasury yield environment,” Gross said.
- DWS Municipal Income Trust (KTF) , a closed-end municipal bond fund, yielding 7% before the tax benefit. “There are 20-30 of these funds,” he said. “The 7% yield may not last forever. But for now these funds trade at 6-8% discounts and show no sign of lowering dividends.”
The author owns shares of Allete.
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