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11/20/2023 Market Strategy

  • John Stoltzfus
  • November 20, 2023

Right-Sized Expectations Met with Positive Surprises

Given inflation running well above the Fed’s target, are expectations of a rate cut being priced in too soon?

Key Takeaways

  • With 94% (471) of the firms in the S&P 500 index having reported third-quarter earnings, results have been generally stronger than expected with earnings growth of 2.8% from a year earlier on revenue gains of 1.7%. Eight of the 11 sectors have registered positive earnings growth with three of those sectors posting double-digit earnings growth.
  • Bond prices rallied last week after data for October suggested a slowing in activity after Q3’s upturn and a softening in inflation pressures. The yield on the 10-year Treasury fell 22 basis points to close at 4.44% on Friday.
  • A third consecutive week of gains for the S&P 500 left the benchmark by Friday’s close just 1.7% off from where it stood at its high for this year on July 31.
  • A raft of US economic data including home sales, durable goods and consumer confidence are on tap, as well as Black Friday sales indicators after the Thanksgiving Holiday on Thursday. 
abstract financials

A Thanksgiving Day holiday abridged week will nonetheless provide enough economic data points and Q3 earnings reports from S&P 500 companies to lure investors to their screens to ponder the latest flow of information and consider what direction the markets will take from here to year end.

Last week was another good week in a series of three good weeks since October 31st for stocks with a combination of better than expected inflation data, S&P 500 Q3 earnings results and a brace of corporate forward guidance providing enough wind under the wings of the current rally to respectively lift the Dow, The S&P 500, the NASDAQ Composite and the Russell 2000 by 1.94%, 2.24%, 2.37%, and 5.7%. Barron's noted this week that over the course of the past three weeks the S&P 500 has advanced 10%—its largest three-week gain since 2020.

We'd note that in contrast this latest 10% rally comes post the pandemic period with neither the support of added stimulus from the Fed nor further fiscal policy actions from the Administration or Congress. A positive sign indeed.

Quotation from Aenean Pretium

We are of the view that the fourth quarter of next year is more likely to see the first of any rate cuts that lie ahead.

A rally in bond prices that contributed to the lift in stock prices saw the 10-year yield move 22 basis points lower to yield 4.44% by the week's close last Friday as bond market participants may have begun to sense that rates may not have to go higher for longer but rather may be left unchanged at current levels for some time.

Last week's inflation data in our view supports our belief that the Fed's efforts are being rewarded as the pace of inflation is slowing even as the central bank's monetary policy since last year has so far shown enough sensitivity in its application to so far avoid a recession.

In our view market expectations (reflected in interest rate futures) that imply up to four rate cuts in 2024 are too rosy and are likely to be tested. Our expectations persist for the Fed to stick with its 2% inflation rate target for now keeping the potential for one or two more rate hikes on the table into next year should inflation remain sticky.

Last week’s CPI report suggested to us that “progress not perfection” is the order of the day as the Fed's inflation goal is still somewhere in the distance. We are of the view that the fourth quarter of next year is more likely to see the first of any rate cuts that lie ahead.

Looking ahead

We remain positive on equities and expect a broadening of the rallies recently experienced as the US economy continues on a sustainable economic expansion albeit at a modest pace.

Our call for US investors to favor US equities over international equities this year and in recent years has worked well particularly when performance is reconciled in dollars.

The dollar's strength this year has been an impediment to performance of non-currency hedged investments in foreign markets where the underlying currency is weak against the dollar. The strength of the dollar tends to reduce gains, accentuate losses and reduce the benefits of foreign dividend yields which can be nominally higher.

Expectations that the Fed may be nearing an end to its current rate hike cycle have begun to lessen the strength of the dollar providing the need in our view for US investors to consider increasing exposure to foreign investments or reducing the level of currency hedging they currently employ when investing abroad.

With geopolitical risk remaining elevated across much of the globe the US dollar is likely to remain a safe haven asset into the future. That said as the US appears likely to be leading the world out of the rate hike cycle and into a period of rate normalization some weakening in the dollar should be expected as the Fed moves forward.

Mid-cap and small cap stocks as represented by the S&P 400 (mid-caps), the S&P 600 (small caps) and the Russell 2000 (small caps) have seen improved recent performance.

Our preference remains with large cap and mid-cap stocks near term as small cap companies can be more vulnerable in a rising rate environment.

As the likelihood of an end to the Fed funds rate hike cycle becomes more evident and particularly if the Fed is able to skirt a recession this hike cycle we would expect the rallies in the mid- and small caps to become more sustainable. Valuations of both mid-cap and small cap stocks remain well below their average five year multiples.

We wish our readers a happy and safe Thanksgiving Holiday.

After enjoying the holiday with friends we'll be sure to watch (and participate) in the shopping that takes place over the next few days on Black Friday and Cyber Monday.

John Stoltzfus headshot

John Stoltzfus


Chief Investment Strategist, Oppenheimer Asset Management Inc.

John is one of the most popular faces around Oppenheimer: our clients have come to rely on his market recaps for timely analysis and a confident viewpoint on the road forward. He frequently lends his expertise to CNBC, Bloomberg, Fox Business, and other notable networks.

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