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Growth investors should be rejoicing this year as the US market has been on a tear.
The bellwether S&P 500 Index has risen by 22% year-to-date while the technology-heavy NASDAQ Composite Index has surged by close to 24% year-to-date.
Both indices are touching their all-time highs as investors remain ebullient despite continued macroeconomic uncertainties and amid the threat of supply chain disruptions from the ongoing Russia-Ukraine and Israel-Hamas wars.
It seems like a no-brainer to own a bunch of growth stocks as the market continues to head higher.
Investors may be wondering, however, if this run can continue.
Can the bullish momentum be sustained? Or could there be a sharp pullback for this rally?
Interest rates poised to head lower
Last month, the US Federal Reserve (“Fed”) made its first interest rate cut in four years.
The central bank slashed its key overnight borrowing rate by 0.5 percentage points to a range of 4.75% to 5%.
This move signalled the beginning of the Fed’s easing cycle as it attempts to make borrowing more attractive in an effort to stimulate the economy and head off a potential recession.
The cut was also in response to a weakening labour market along with moderating inflation, signs that the central bank perceive to be indicative of a potential economic downturn.
Officials at the central bank also raised the expected unemployment rate for 2024 to 4.4%, up from the previous forecast of 4%.
Elevated interest rates tend to crimp consumer spending, resulting in lower demand for goods and services.
Because of this, companies expand more slowly and may end up with excess capacity, thus necessitating job cuts to reduce overall costs as revenue growth slows or turns negative.
The Fed’s original plan was to have another full percentage point cut by the end of next year followed by a half-point cut (i.e. 0.5 percentage points) in 2026.
Should these cuts be initiated, it could invigorate growth and lead to a sharp rebound in consumer sentiment.
In turn, companies will benefit as lower borrowing costs will spur them to increase production and spend on capital expenditures.
Soft landing for the US?
Of course, what the Fed officials decide to do will also depend on a slew of economic data.
Chairman Jerome Powell was careful not to over-commit by saying that officials need time to digest incoming economic data about GDP growth, the labour market, and other pertinent statistics before coming to a decision.
Unsurprisingly, the Fed is treading carefully as it wishes to avoid a repeat of the criticism levelled against it when it failed to raise interest rates quickly enough to counter the initial bout of sharp inflation.
The Federal Reserve Bank of San Francisco President Mary Daly feels that the central bank may cut rates once or twice more this year as long as the data meets expectations.
Looking over at the latest jobs data, US job creation remained robust as payrolls surged by 254,000 in September.
This number was significantly better than the 150,000 forecasted by Dow Jones.
The unemployment rate fell from 4.2% to 4.1%, defying expectations of an economic slowdown.
Average hourly earnings were also up 4% year on year for the month.
Although this data bodes well for the economy, it may compel the Fed to stay its hand when it comes to lower rates for fear of inflation roaring back with a vengeance.
Hence, the US economy seems to be enjoying a soft landing, but investors will need more data in the coming months to confirm this.
Strong results from the Magnificent 7
Another reason for the bullishness is strong results coming from the Magnificent 7 stocks.
These stocks are the largest capitalisation stocks in the US market and comprise Meta Platforms (NASDAQ: META), Amazon (NASDAQ: AMZN), Alphabet (NASDAQ: GOOGL), Apple (NASDAQ: AAPL), Tesla (NASDAQ: TSLA), Nvidia (NASDAQ: NVDA), and Microsoft (NASDAQ: MSFT).
Of the seven, Tesla is the first to report its third quarter of 2024 (3Q 2024) earnings.
The electric vehicle manufacturer saw revenue for 3Q 2024 rise 8% year on year to US$25.2 billion.
Operating profit soared 54% year on year to US$2.7 billion while net profit climbed 17% year on year to US$2.2 billion.
Free cash flow stayed strong for the quarter at US$2.7 billion, more than three times the US$848 million churned out in 3Q 2023.
Alphabet also delivered a sparkling set of earnings for the second quarter of 2024 (2Q 2024).
Revenue rose 14% year on year to US$84.7 billion while net profit improved by 28.6% year on year to US$23.6 billion.
Meta Platforms announced an even stronger set of results for 2Q 2024 with revenue jumping 22% year on year to US$39.1 billion.
Net profit soared 73% year on year to US$13.5 billion.
With the Magnificent 7 stocks reporting strong numbers, there is a good reason for investors to feel optimistic.
Get Smart: Be selective in the stocks you buy
It’s clear that this year is turning out to be a watershed one for the major US indices.
With new highs being hit almost weekly, it’s natural for investors to feel cautious.
You should, therefore, be selective in the stocks you buy.
Keep an eye out on valuations and ensure that you size your position according to the perceived risks and rewards.
If you do so, your investment portfolio should turn out just fine.
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