by Bryan Perry

December 27, 2023

In this coming year, it will be challenging to find a rallying cry as energetic as the AI-related surge of 2023. For most of 2023, tech stocks led the way, but in the closing weeks of the year, the market broadened out to include even the lagging small caps and regional banks, thanks to a Fed pivot announced by Chair Jerome Powell at the December 13 Federal Open Market Committee (FOMC) meeting, in which Fed officials released their projections of perhaps three rate cuts next year and three or four more in 2025.

Jerome Powell

Powell’s dovish pivot came as a surprise, a 180-degree reversal of his “higher-for-longer” narrative that the Fed had embraced going into the mid-December meeting, as voiced by several Fed officials. The news that day triggered an amazing rally within the bond market that drove yields on the benchmark 10-year Treasury bond from near 5% down to 3.8% in six weeks, creating the fuel to push stocks to record highs.


Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

This fourth-quarter rally will be a hard act to follow. Based on the capital gains logged by many investors during the recent wave-up for stocks, it is likely that the front end of January could see some broad selling pressure as investors book those gains – based on the idea that the market has pulled forward and priced-in future expectations. This pullback could be one of the more pronounced “buy the rumor, sell the news” setups facing investors in the last week of 2023, which technically defines the year-end Santa Claus rally.

Assuming there is material selling pressure early in January, such a correction will be constructive for the market. Many of the market’s leading stocks and sectors are technically extended and due for some consolidation. Being that fourth-quarter earnings season comes into its fullness during the third week of January, the quintessential setup is for the best-of-breed stocks and sectors to pull back in the first half of January. This backing-and-filling will position the market to constructively build on its heady Q4 gains.

Straight up moves for markets invite elevated levels of volatility and shakeouts. The ideal investing landscape is one of a stair-step pattern – a move higher, a lateral consolidation, then a new move higher. This price action can only be supported by further confirmation of lower future inflation trends, rising corporate sales and earnings growth, and a series of Fed rate cuts – which the market now expects.

The forward 12-month P/E ratio for the S&P 500 is now 19.3, which is slightly above the 5-year average (18.8) and 10-year average (17.6). Beings the market is priced at the upper end of the 10-year range, this valuation must be supported by accelerating growth. Based on FactSet guidance, this should be the case.

“Despite concerns about a possible recession next year, analysts expect the S&P 500 to report double-digit earnings growth in CY 2024. The estimated (year-over-year) earnings growth rate for CY 2024 is 11.8%, which is above the trailing 10-year average (annual) earnings growth rate of 8.4% (2013 – 2022). On a quarterly basis, analysts are expecting the highest earnings growth to occur in Q4 2024. For Q1 2024 through Q3 2024, analysts are projecting earnings growth of 6.8%, 10.8%, and 9.0%, respectively. For Q4 2024, analysts are projecting earnings growth of 18.2%.”


Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

“All eleven sectors are predicted to report year-over-year earnings growth in CY 2024. Five of these sectors are projected to report double-digit growth led by the Health Care, Communication Services, and Information Technology sectors.” (FactSet, by John Butters, December 11, 2023)

Despite concerns about geopolitical turmoil and the presidential elections, assuming this set of earnings growth projections is even close, one can argue that the market will maintain its premium valuation and build on its 2023 gains. In light of all the potential headline risk, what the market cares about most of all is sales and profit growth. This is the holy grail of bull markets. Everything else is secondary in priority.

With all that said, there is one keystone of stability that the current bull market needs to stand on, and that is a stable bond market – one where interest rates don’t move higher again, primarily due to re-emerging inflation. To put it bluntly, bonds don’t need stocks, but stocks need bonds. The year-end 2023 stock rally would not have materialized without having been ignited by the rally in bonds, which began October 19.

The one event that sticks out from all other recent events is the sudden change of heart and policy position by the Fed. To go from a “higher-for-longer” mantra to a “three rate cuts in 2024” narrative stirs thoughts about what new data they saw that evoked such a sudden pivot on policy. In my view, it is the health of the consumer, their depleted savings levels, and the high level of household balance sheet leverage.

With consumer outlays accounting for 70% of U.S. GDP, any dialing back of discretionary spending will likely impact investor sentiment. With 10-year rates falling by over 100 basis points while the Fed funds rate remains at 5.25%-5.50% (and it will stay there for at least 90 days, according to bond futures forecasting), monetary policy won’t change abruptly without some key information that drives it to do so.

I would argue that the piling on of debt at several levels has something to do with the recent pivot. The level of outstanding credit card debt alone is pushing $1.1 trillion, and those rates are all over 20%:


Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Six weeks ago, extreme levels of federal, household and student debt mattered to the market. Today, we hear not a peep. The cost of interest on these three mountains of debt is tied to short-term rates, which are unchanged. The only thing that has really changed is that there is more debt being created every day. That is something to think about going into the New Year. It might be what’s on the mind of the Fed as well.

On the other hand, the blue-sky view is that the Fed sees the war on inflation as won and is in a position to cut rates at a quick pace – not just to meet the bond market where it’s at, but also to provide relief to the burgeoning cost of carrying the behemoth debt loads that must be serviced. At this juncture, market participants seem to be betting on the latter scenario as a rationale to push overall debt levels even higher.

All content above represents the opinion of Bryan Perry of Navellier & Associates, Inc.

Please see important disclosures below.

Also In This Issue

Global Mail by Ivan Martchev
Awaiting the Santa Claus Rally

Sector Spotlight by Jason Bodner
When Opinions Go to War, Rely on the Data

View Full Archive
Read Past Issues Here

About The Author

Bryan Perry

Bryan Perry

Bryan Perry is a Senior Director with Navellier Private Client Group, advising and facilitating high net worth investors in the pursuit of their financial goals.

Bryan’s financial services career spanning the past three decades includes over 20 years of wealth management experience with Wall Street firms that include Bear Stearns, Lehman Brothers and Paine Webber, working with both retail and institutional clients. Bryan earned a B.A. in Political Science from Virginia Polytechnic Institute & State University and currently holds a Series 65 license. All content of “Income Mail” represents the opinion of Bryan Perry

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