Fundamental Focus

Markets are off to a slower start in 2024 compared with the blistering pace of November and December. With participants taking profits in some of 2023’s biggest winners, the S&P 500’s nine-week winning streak has come to an end. Still, overall market trends remain decidedly positive, and the subtle broadening of the market that began in the fourth quarter has continued. With the Fed looking to normalize interest rates, a contentious Presidential election on the horizon, and geopolitical tension rising across the globe, 2024 will certainly not be lacking in excitement. For stocks to perform well in this landscape, companies will need earnings growth to materialize. Those that can demonstrate fundamental growth could become a haven amid the uncertainty, especially with an unprecedented level of cash waiting it out in money market funds.

By all accounts, the Fed is making good progress in pulling off their “soft landing.” Inflation has been on the decline for the last 6 months and the economy continues to stand resilient. A reduction in job openings vs. actual job loss has been key to the Fed’s success. Because of this, pressure on wages to increase has eased even with unemployment near historic lows. In addition, the federal government has played a large role in stoking liquidity. The Treasury has added liquidity by spending down the Treasury General Account, creating the bank term funding program, and choosing to issue a greater amount of debt on shorter bond maturities. While the government’s fiscal health has deteriorated as a result, investors have seen little reason to worry as long as inflation stays tame.

As it stands today, the economy is on solid footing and analysts are optimistic about the prospects for corporate earnings growth. The consensus forecast for this year’s S&P 500 earnings growth stands just over 12%. With 2023’s gains driven by expanded valuations, it is crucial that companies deliver on earnings growth. Companies demonstrating robust organic growth and careful expense management should be rewarded by the market. If rates on short-term bonds are to come down, some of the cash parked in money market funds could begin to seek out more lucrative alternatives, which could be a catalyst for stocks. Choosing the right stocks will be vital.

In our approach, we are looking for under the radar companies with strong fundamentals. For most of 2023, the market was spurred by the performance of a select few stocks, but that has now expanded to include more companies with solid strengths. Towards the end of the year, performance began to broaden and this seems to have continued in the first week of 2024. The market is uncovering more of these stories of fundamental strength. A stock with a combination of value, a compelling story, and positive momentum remains a powerful choice for our strategies.

Thanks,
Preston May, CBE®
Research Analyst