Let’s review our thoughts on the “Triple Threat for 2024”:
- Markets LOVE when the Fed goes from hiking rates to pausing to cutting rates. Right now, markets odds are 60/40 for a March 2024 rate cut.
- Equity market multiples have spent the last 2 years resetting lower. See the beautiful chart and prose below.
- Markets have largely gone sideways for 2 years because corporate earnings have gone sideways/modestly lower. The 2021/2022 spike in inflation ate into profit and margins. That will reverse in 2024 – coming attractions.
As for Triple Threat #2, the broad market saw a meaningful spike after the COVID market sell-off. Interest rates went to zero and $7 trillion of monetary and fiscal stimulus has thrown at the COVID crisis. Some of that worked and some didn’t but it left an inflation overhang and broad market multiples have spent the last two years shrinking as rates have gone higher. With the thinking that peak inflation is now behind us, rates should reverse lower and equity markets multiples expand. A P/E multiple of 16x for the broad, equal weighted SP500 is not a high price to pay. The “magnificent 7” (AAPL, AMZN, TSLA etc) now trade at a P/E of near 29x for reference. Nothing against them: they are world class enterprises with well above average growth but…..the broader market and less market capitalization (more mid cap and more small cap) appears better value to yours truly.
Rate cuts + multiple expansion + earnings growth
Source: FactSet, JPMAM as of December 26, 2023
Richard Barrett
Chief Investment Officer
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