From the studio

Video: CIO’s Sundeep Gantori on tech earnings, chip valuations, and Fed cuts (21:47)

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Thought of the day

Major US equity indexes have traded higher in eight of the past nine trading sessions, helping to erase memories of the equity sell-off from early August. The S&P 500 and Nasdaq Composite now stand roughly 1% and 4% below their respective July highs, while the MSCI Asia ex-Japan and STOXX 600 indexes are both less than 2% below their all-time highs. In addition, the VIX index of implied US equity volatility, a popular gauge of fear in markets, has fallen to around 16 points, less than a quarter of its intra-session peak on 5 August.

This revival in equity momentum comes ahead of Federal Reserve Chair Jerome Powell’s speech at the Jackson Hole symposium on Friday. Ahead of Powell’s address, we see several reasons to be positive on the outlook for stocks.

US data suggest a soft landing remains more likely than not. While the August nonfarm payrolls on 6 September will be more definitive, weekly jobless claims data supported the view that the weakness in the July employment report was partly due to disruptions caused by Hurricane Beryl. Even with the bad July print, the three-month average for US monthly job gains remains at a solid 170,000. Other US data since the payrolls print have been more encouraging, with consumer price inflation (CPI) easing back toward the Fed’s 2% target and US July retail sales outperforming consensus forecasts.

S&P 500 earnings showed companies are still delivering growth. Second-quarter earnings results were not quite as strong as other recent quarters, and some notable misses on guidance may have contributed to volatility in early August. But in aggregate, earnings were fine and guidance has held up with revisions, in line with normal seasonal patterns. Despite some mixed results from megacap tech, we see no slowdown in AI spending. As a result, we maintain our forecast that S&P 500 profits will grow 11% this year and 8% next year.

Top Fed officials appear confident that it will soon be appropriate to start cutting rates. At Jackson Hole, Fed Chair Powell is expected use the opportunity to help clarify the Fed’s likely path as it withdraws restrictive policy. Failing that, the September dot plot updates and policy decision should provide clarity. We do expect the Federal Reserve to respond by front-loading interest rate cuts. We now expect the Fed to ease interest rates at each of its three remaining meetings in 2024, with the potential for a 50-basis-point rate cut if warranted by a weakening of the labor market or consumer spending. Historically, we note that Fed rate cuts in non-recessionary periods have been quite favorable for stocks, with the S&P 500 rising by 17% on average in the 12 months after the first one.

So, we think the environment remains supportive for stocks, with still-strong economic and earnings fundamentals, and a Fed poised to cut interest rates from restrictive levels. Our base-case year-end and June 2025 S&P 500 price targets remain 5,900 and 6,200, respectively, compared to 5,597 as of 20 August. We believe quality growth remains well placed to outperform. Firms with competitive advantages and exposure to structural drivers should be better positioned to grow and reinvest earnings consistently. Alongside public equity exposure, we think alternative investments remain a compelling strategic source for both portfolio diversification and risk-adjusted returns. Investing in alternatives does come with risks, including around illiquidity and a lack of transparency.