The S&P 500 (SPY) is up over 20% this year, and all seems well in the world. However, there is one big red flag for the market to be aware of that could prevent further gains. Steve Reitmeister explains it in detail in his latest commentary below.
Most of what we see in front of us as stock investors is a green light to move forward.
But…and this is a big one, there is one red flag flashing that you need to understand if you want to be more successful with your investments in the coming months.
Let’s discuss this red flag in detail and connect it to an investment plan that will help you stay on top of the market going forward.
market outlook
Let’s start by looking at the bright green lights for investors right now.
We are just a few weeks away from the new bull market starting in October 2022, which will be 24 months away. History tells us that the average bull market lasts 63 months, so there’s good reason to think there’s plenty of time left. “Don’t fight the Fed” is a famous investor rallying cry when the Fed cuts interest rates. Because lower interest rates are a catalyst for future economic growth, leading to higher corporate profits and, most importantly, higher stock prices. The party officially began at the Fed meeting on September 18th, when it announced an initial 50 basis point rate cut, with expectations for another 150 basis points worth of cuts by the end of 2025. It’s hard not to be bullish that the Fed is finally on our side. Typically, the Fed lowers interest rates to support a struggling economy, often in the midst of a recession. Surprisingly, GDP is growing at a healthy pace, with the Atlanta Fed’s GDPNow model showing above-trend growth of +2.9% in Q3. In other words, there is no recession in sight, and there is little reason to fear a significant stock price decline, other than the occasional pullback or correction that often occurs during secular bull market cycles.
With the above green lights in place, you are no doubt finding it difficult to worry about investing in stocks. That’s why I need to share the most important red flags right now. The current valuation of the stock based on market capitalization in the chart below is:
Megacap (pink line) valuations are abnormally obese compared to historical norms. No…it’s not a valuation like the 1999 Internet bubble…but it’s a valuation level that can’t be sustained, and these stocks (like the Magnificent 7) will continue to drop in valuation. This is a level where we fully expect it to underperform.
Overall, large-cap stocks (red line) seem to have good value at this stage. A key factor for the big rally will be an acceleration in profit growth after two years of weakness. Happily, Wall Street analysts expect that to happen in the second half of 2025, when the benefits of lower interest rates take hold. Therefore, earnings for this large-cap group over the coming year are likely to be modest at best. But I wouldn’t be surprised if it breaks even.
This leaves us focusing on small-cap stocks (green line) and mid-cap stocks (blue line) as the place to find value and future outperformance. If you go back 100 years, these stocks have led large-cap stocks by a wide margin in terms of annual returns. But for the better part of the past four years, that hasn’t been the case.
We can see the tide turning in September as interest rate cuts look certain and investors pile into small-cap stocks that have outperformed this month. This risk-on shift is logical and should continue given the better value proposition.
Now, for the record, I don’t think the S&P 500 (SPY) will be much higher than 6,000 in 2025. In fact, it could benefit from a typical post-election bull market and reach that level before the end of 2024. Next is the Santa Claus gathering.
This means 2025 is likely to be a flat year for large-cap stocks. So those looking for outperformance should focus on small- and mid-cap stocks with the right mix of earnings growth and attractive valuations.
The good news is that we make that job even easier by focusing on the top picks from the POWR Ratings model, which examines 13 growth measures and 31 value measures.
Going back to 1999, the POWR Ratings model zeroed in on these best-in-class stocks, with an average annual return of +28.56% since 1999.
I’ll share some of my personal favorites in the next section. read more…
What should I do next?
Check out my current portfolio of 11 stocks packed with great benefits from our unique POWR Ratings model. (It outperformed the S&P 500 by a factor of nearly 4x going back to 1999).
These picks are all based on my 44 years of investing experience, having seen bull markets, bear markets, and everything in between.
And now this portfolio is beating the market stuffers.
If you want to learn more and see my 11 timely stock recommendations, click the link below to get started today.
Steve Reitmeister’s Trading Plan and Top 11 Stocks >
I wish you success in your investments.
Steve Reitmeister…but everyone calls me Latey (pronounced “righty”)
StockNews.com CEO, Reitmeister Total Return Editor
SPY stock rose $0.38 (+0.07%) in pre-market trading on Friday. Year-to-date, SPY has increased 21.54%, compared to the benchmark S&P 500 index’s increase of % during the same period.
About the author: Steve Reitmeister
Steve is better known to StockNews readers as “Reity.” Not only is he the company’s CEO, he also shares 40 years of investment experience with the Reitmeister Total Return Portfolio. Learn more about Reity’s career and find links to his latest articles and stock picks.
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