U.S. stocks moved sharply higher on Monday, kicking off a November rally that some market experts predict will continue through the end of the year. The S&P 500 jumped 2.5%, recovering some of the losses from last week’s sell-off that pushed the index into correction territory.
Driving the rebound were comments from Wharton School finance professor Jeremy Siegel, who expressed optimism about the market’s prospects over the next couple months. “It pays to be bullish long-term all the time in the stock market,” Siegel said on CNBC Monday morning.
“In a way I say ‘thank goodness October is nearly over. I looked up the data, over the last 25 years, November is the second best month of the year (for stocks), just slightly behind April which is the first best month. So I do think we’re going to have a year-end rally over here coming up.”
Siegel Expects Fed to Stay the Course
Much of the market’s recent volatility has been driven by uncertainty around how aggressive the Federal Reserve will be in raising interest rates to fight inflation. The Fed’s policy-setting committee begins its next two-day meeting on Tuesday, with a decision on rates coming Wednesday afternoon.
While many investors fear the Fed could shock markets with a larger-than-expected hike, Siegel believes the central bank will stay the course. “The Fed is certainly not going to do anything on Wednesday and they’re going to leave the door open (for more rate increases)… There’s no docs this meeting, so we won’t know what all of the FOMC members are going to be thinking,” he said.
If the Fed opts for its fourth consecutive 0.75 percentage point increase as expected, stocks could rally on the news given it won’t be more aggressive. Still, Siegel noted that monetary policy remains restrictive as the Fed tries to cool demand and bring down stubbornly high inflation.
Earnings Remain Resilient Amid Slowing Economy
Beyond the Fed meeting, investors are continuing to parse the ongoing third-quarter earnings season for signs of how companies are faring amid high inflation and rising interest rates. So far, results have been better than feared.
With over half of S&P 500 companies having reported, earnings are on track to grow about 2% year-over-year. Given expectations for an earnings decline heading into the season, profit growth – even modest – is being welcomed by the market.
Several big tech companies like Microsoft, Alphabet and Apple saw their stocks pop last week after releasing financial results that showed resilience despite the slowing economy.
“The earnings reports we’ve gotten for the third quarter have come in substantially better than expected,” said Siegel. “That’s given me confidence that earnings estimates for the next 12 months are too pessimistic.”
Strong consumer spending has helped boost revenues for many retailers and consumer goods companies like Coca-Cola, which raised its full-year earnings guidance last week. While there are pockets of weakness, overall corporate profits have held up reasonably well so far.
Market Valuations Becoming More Attractive
Despite its recent bounce, the S&P 500 remains deep in correction territory – down 22% for the year and 15% off its October 2022 low. That has brought stock valuations closer to historical averages, an encouraging sign for Siegel.
“Returns in the market over the next one, two, five, 10 years are very good. If you can invest 15% off of a bear market low, which is what we had a year ago, your subsequent returns have exceeded the market by quite a margin,” he noted.
The S&P 500’s forward price-to-earnings ratio has fallen to about 16.5 from over 21 at the start of the year. While not yet cheap, valuations are becoming more attractive – especially compared to bonds – as equity risk premiums rise.
If profits can continue to grow modestly in the coming quarters, the market’s recent derating could set the stage for an extended upswing. “Once this bear market runs its course, Siegel sees scope for another long bull run. “The fundamentals of the economy are good. Productivity is high, and we’re innovative.”
Uncertainty Still Abounds
Of course, risks abound that could derail the rally Siegel is anticipating. The Fed’s ongoing monetary tightening and its impact on growth remains a concern, especially with recent data pointing to a weakening economy.
Many economists expect a recession in 2023 as the cumulative effect of rate hikes slows activity, hurts employment and depresses corporate earnings. Meanwhile, inflation continues to hover near 40-year highs, squeezing consumers.
Geopolitical tensions, particularly the war in Ukraine, are another wild card that could rattle markets. Also, with the U.S. midterm elections just a week away, the balance of power in Congress hangs in the balance.
Siegel acknowledges these risks, but believes stocks can power through the uncertainty. “There are still a number of mixed signals for the economy,” he said. “But the bottom line is that the bull market is ready to resume, if the Fed doesn’t overstep.”