The Unstoppable U.S. Stock Market

The Unstoppable US Stock Market

The U.S stock market continues to set records. Both the Nasdaq Composite and S&P 500 Index reached record highs. The U.S. stock market seems unstoppable, especially compared to other countries.

The immediate cause was June’s unemployment report, which showed a slight slowing in job growth and an unemployment rate that ticked up to 4.1%, the highest value in 2-1/2 years but still historically low. Also, wage gains slowed. This was seemingly good news in the topsy-turvy investing world because it changed the likelihood of the U.S. Federal Reserve increasing interest rates.

That said, the reality is the American economy is powering ahead on the strength of its services sector, AI and cloud computing growth, military spending, and Baby Boomer retirement. 

It’s no secret that the Magnificent Seven, a group of mega-cap tech stocks, continue to lead the way. The seven companies are Microsoft, Apple, Nvidia, Alphabet, Amazon, Meta Platforms, and Tesla. Their combined market capitalization is nearly $16 trillion. Only Tesla is worth less than $1 trillion because of rising competition and slowing sales. The total is more than the Gross Domestic Product of every country except the U.S. and China

Another major contributing factor is much lower inflation. Although earlier price increases are here to stay, the Fed has seemingly brought inflation under control and close to its target value of 2%.

However, because much of the gains are from a handful of stocks, the downside risks are rising. People concentrated in the Magnificent Seven and other tech stocks should look hard at their portfolio concentration. The U.S. stock market will not rise forever. Downturns eventually come, and it’s best to be prepared.

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Stock Market This Week

Stock Market This Week – 07/05/24

Data from Stock Rover* showed the stock market had another excellent week in this bull market. The Nasdaq Composite performed the best as technology stocks climbed. It was followed by the S&P 500 Index, the Dow Jones Industrial Average (DJIA), and the Russell 2000.

Six of the 11 sectors had positive returns this week. The Technology, Communication Services, and Consumer Cyclical sectors were top performers. However, the Industrials, Health Care, and Energy sectors were the worst performers.

Oil prices rose to ~$83. The VIX fell to about 12.4, still well below its long-term average. Gold ended the week at ~$2,398 per ounce.

The American bull market continues because of the strength of its economy. Unemployment remains at roughly 4%, job growth remains robust, and inflation continues its long march downward. Some categories in consumer staples are starting to show price declines. Also, geopolitical situations have stabilized, especially after multiple aid packages were passed at the end of April. The bottom line is that investors are still driving share prices up.

The Nasdaq Composite leads the way, followed by the S&P 500, the DJIA, and the Russell 2000. Small-cap stocks continue to struggle in this era of large-cap tech dominance. Ten of the 11 sectors have positive returns. The top performers in 2024 have been Technology, Communication Services, and Utilities, while the Consumer Cyclical, Basic Materials, and Real Estate sectors are trailing.

The dividend growth investing strategy started the year down but has recovered. Larger market capitalization stocks are performing better than smaller ones. The table below shows their performance by category. Dividends and passive income streams continue to grow.

Stock Market Valuation This Week

The S&P 500 Index trades at a price-to-earnings ratio of 28.93X, and the Schiller P/E Ratio is about 36.25X. These multiples are based on trailing twelve months (TTM) earnings.

The long-term means of these two ratios are approximately 16X and 17X, respectively. 

Despite the recent correction, bear market, and rebound, the market is still overvalued. Based on historical data, earnings multiples of more than 30X are overvalued.

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