As I was reviewing the economic and performance numbers recently, a hit song from my teenage years came to mind. Simply put, as The Cars sang in 1978, let the good times roll. We believe there are at least three solid reasons that the gains we saw in the first quarter are sustainable, and that the equity markets still have additional upside potential, advises Brian Kelly, editor of Money Letter.
First is the steady, but not dazzling, economic growth. There is an underlying economic momentum that seems to have put the “hard landing” scenario out of sight. Q4 2023 Gross Domestic Product (GDP) was just revised upward to +3.4% after a 3Q reading of +4.9%. Both numbers represented positive surprises and were well ahead of the pace set in the first half of 2023.
While the economy is undoubtedly slowing after 11 interest rate hikes by the Federal Reserve, the central bank projects growth to be stronger in 2024 than they thought just a few months ago (+2.1% for the year). Steady, but not dazzling.
Strong corporate earnings are the second positive factor. Earnings for S&P 500 companies grew 9.8% year-over-year in the fourth quarter, according to data from LSEG and Capital Group. Although results in Q1 2024 may be a bit lower, consensus estimates for 2024 as a whole suggest a sustained earnings rebound.
Third, the excitement and momentum surrounding Artificial Intelligence (AI) will continue to drive big tech and should spread to smaller tech companies as they figure out how to monetize it. And while the tech sector is looking expensive on a historical basis, it is nowhere near the Dot-Com Bubble levels seen in 2000.
Right now, tech stocks are priced at about 27 times forward 12-month earnings. During the Dot-Com Bubble, it was closer to 60x. If AI continues to drive growth (and we believe it will), then the sector will be okay.
