Weekly Buzz: Does this bull rally have legs?

🐂 Behind the S&P 500’s bull run

Last week, the S&P 500 entered bull market territory, surging nearly 20% from a recent low in October 2022 – but not everyone is convinced the good times will keep rolling.

In a recent research note, strategists at Morgan Stanley said they expect a sudden pullback in corporate earnings to slam the brakes on this US stock rally. More specifically, they expect earnings per share for the S&P 500 to drop 16% this year, driven by slowing revenue growth and shrinking profit margins. On the back of that, the investment bank expects the S&P 500 to end 2023 at 3,900 – roughly 9% below today’s level.

However, note that not all strategists are as pessimistic as Morgan Stanley – Goldman Sachs, for example, anticipates mild growth in S&P 500 earnings per share in 2023, while Evercore ISI recently raised its S&P 500 year-end target by 7% to 4,450. Evercore believes that easing inflation will push the Federal Reserve to pause its interest rate hikes.

A bear in bull’s clothing?

Because the S&P 500 is weighted by market value, strong performance from a handful of stocks can boost the overall index – in this case, Big Tech companies, like Microsoft and Nvidia, which have been posting huge gains thanks to the AI boom (we’ll be deep diving into this topic in our upcoming June CIO Insights!).

So, while the current rally conforms to the traditional definition of a bull market (more on that below in Jargon Buster), the 20% threshold may be too simplistic. For example, post-pandemic, the market experienced sharp declines and strong rebounds within a short timeframe. In these types of environments, we should also consider other factors – like valuations or fundamentals – to better evaluate market performance. In other words, this rally may be a sign that we’ve entered a bull market – but there’s also a chance of this being a “bear market rally.”

What does this mean for your portfolios?

As exciting as a rally can feel, don’t assume the stock market will always move upwards. Market movements can be unpredictable, easily reversing course overnight. Rather than trying to time the market, a better strategy would be to continue to dollar-cost-average into a diversified portfolio that matches your risk appetite.

Within the StashAway universe, it’s worth noting that: 

1. Our General Investing portfolios offer exposure to these large tech companies through well-diversified allocations across equity markets.
2. To manage specific exposure to large-cap stocks, our Flexible Portfolios can provide exposure to indexes such as the S&P 500 under US Equities.
3. Our Technology Enablers thematic portfolio makes it easy for you to invest in the companies and sectors driving the development of technologies like AI.

This section was written in collaboration with Finimize.

🎓Jargon buster: Bull market

A bull market is a period when a financial market sees prices rising across the board. Traditionally, a bull market is declared when prices rise 20% from a recent low. The bronze bull – a famous icon on Wall Street – is symbolic of bull markets: it is a charging herald of prosperous times, when investor sentiment is high and the future looks bright.

While bull markets can last anywhere from months to years, they don’t last forever. Take 1980’s Japan, for example: economic growth was rapid and confidence was at an all-time high, but the good times ended when Japan’s asset bubble burst in 1992.