The stock market surged for the first 6½ months of 2024, with the S&P 500 index hitting records in 38 sessions before stalling.
It has slipped 3% to 5,494 from its July 16 record high.
The outlook for stocks going forward is cloudy, and the August consumer inflation report didn’t make things any clearer. The Consumer Price Index rose 2.5% year on year, the lowest since February 2021.
But excluding food and energy prices, the index gained 3.2%, unchanged from July. The Fed has a 2% target for inflation, but that’s based on a different indicator.
In any case, most experts agreed after the report that the Fed would cut interest rates by 0.25 percentage point at its meeting next week. Some had earlier forecast a half-point cut.
So what does a 0.25-percentage-point rate reduction mean for stocks? The bullish take is that the move will stimulate the economy and thereby boost corporate earnings.
The bearish take is that a rate cut signals that the economy is weakening, which is bad for earnings.
What's happening with corporate earnings
Let’s take a look at the profit picture. Earnings per share for the S&P 500 jumped 11.3% in the second quarter from a year earlier, the highest since fourth-quarter 2021, according to FactSet.
Related: Veteran fund manager views Warren Buffett moves as worrisome
Analysts predict earnings growth of 4.9% for the third quarter, which isn’t bad given the strong second quarter. But some experts say the decelerating economy will prevent that robust a showing.
And in any case, many experts maintain that the market is overvalued. As of Sept. 6 the S&P 500 traded at 20.6 times analysts’ earnings estimates for the next 12 months, according to FactSet. That tops the five-year average of 19.4 and the 10-year average of 18.
Bears also cite the September effect on stocks. The month often brings unhappy tidings for investors. The S&P 500 has slid 1.2% on average in September since 1928, according to Dow Jones Market Data.
That’s the worst monthly performance on the calendar. The index stumbled in 56% of the Septembers.
Related: Major research firm unveils stock market forecast for Q4
Doug Kass is a bit bullish on stocks
TheStreet Pro columnist Doug Kass has been bearish on stocks for months. He has worked as a hedge-fund manager since the 1970s, including a stint as director of research for the legendary investor Leon Cooperman's Omega Advisors.
The recent weakness of many stocks makes some of them attractive candidates for purchase, Kass wrote in his column Sept. 11.
“Many equities have been ignored by investors and have performed far weaker than the averages,” he said. “This is the fertile ground for my long selections.”
His concerns about market fundamentals are slowly being embraced as market consensus, he said. That could be a contrarian bullish indicator for stocks. Falling interest rates should support stocks, too, Kass said.
Fund manager buys and sells:
- Cathie Wood snatches $8 million of battered tech stock
- Top value fund manager says Google-parent Alphabet is deep-value stock
- Morgan Stanley reveals top stock picks, including Nvidia
His earlier concerns reflected prospects for slowing global economic growth and sticky inflation, massive U.S. debt and lofty valuations, Kass said. “While I continue to be concerned about the equity markets, I am now less so.”
Kass isn’t wedded to a positive or negative view of the market. “As a contrarian — armed with a sense of intrinsic values — I am willing to buy weakness and sell strength,” he said.
The most important element of his Sept. 11 column is that “I fully recognize equities perform better than any other asset class over lengthy periods of time,” Kass said.
Among his favored stocks are media/entertainment colossus Disney (DIS) and oil producer Occidental Petroleum (OXY) .
The author owns shares of Disney.
Related: Veteran fund manager sees world of pain coming for stocks
