Earnings growth and fewer interest rate hikes could make for a pretty solid back half of 2024.
Transcript:
CONWAY GITTENS: So let’s go conventional for a minute and go back to the wobble. So we had a spring wobble. I guess it lasted from March to May. Now we’re pretty much back at record highs. And in terms of the stock market, so how is the stock market set up for the second half of the year?
JURRIEN TIMMER: I think it’s set up reasonably well. So earnings growth is positive. So last year earnings declined very modestly, 3% or so. And because we didn’t have earnings growth last year, the market was obsessed about interest rates and the Fed pivoting. And so we were hanging on every word. I mean, we still kind of are today, but the market was very obsessed last year about, you know, how many more times does the Fed have to raise rates. When is it going to stop. When is it going to start cutting rates. And when you think about valuation in the stock market, right, you have earnings growth in the numerator of a discounted cash flow model, meaning that the fair value of the stock market is the present value of future cash flows. So you put the cash flows in the top, you put the interest rate in the bottom, the cost of capital. And when cash flows are growing as they are today, interest rates, you know, don’t really have to come down very much or at all in order for the market mass to work. But when earnings are not growing like they were not last year, you really cannot tolerate very much of a rise in that cost of capital.
So the juxtaposition between rates and earnings last year was more sensitive than it is this year. And that’s why I think the market has handled this, the unpivoting of the Fed, if you will, as well as it has, because remember, back in January, the market was expecting six seven rate cuts just this year and now we’re down to basically 0 or 1, maybe two, but probably not more than that. And the market has handled that pretty well. But to your point, the wobbles, you know, are coming from the rate side and the 10 year yield, of course, which is at 4 and a half percent, plays a role in that as well. And in a way, we’re back to the old days before, let’s say the late 1990s from the 60s to the 90s. It’s a long time ago, but during that regime in the market, you know, bonds were positively correlated to stocks and you would have rising yields, creating wobbles in the stock market. And we’re kind of back to that playbook, right. It happened in 2022, happened last October. Like you said, it happened just over the last couple of months. When rates are rising, it creates wobbles and then it’s just a matter of how strong the earnings picture is in the stock market to withstand those wobbles. And today, the earnings picture is better than a year ago and that should make the market more resilient than it was a year ago to rising rates.
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