• S&P 500 finishes May 4.8% higher in an overall solid year

• Rally could resume as rate cuts are just around the corner

• Valuations remain stretched but earnings beat estimates

 

Stocks defy seasonality and strive for summer rally

The S&P 500 index clocked its best May performance since 2020 in an overall strong year for equity markets. All three major US indices have recorded consecutive record highs in 2024 even though US Treasury yields are significantly higher compared to the start of the year as market pricing shifted from six rate cuts to a little less than two at the moment of writing.

Despite this relentless advance, the CBOE Volatility Index (VIX), Wall Street’s fear gauge, is hovering to its lowest levels in four years. The absence of volatility corroborates the view that the rally could extend even further as interest rate cuts by the Fed will slowly start to kick in and a soft-landing remains the base case scenario.

In that sense, this week could be of high importance as two of the G7 economies are expected to begin their interest rate cutting campaigns, opening the door for the Fed to follow suit. Moreover, this narrative could be reinforced if Monday's weaker-than-expected ISM manufacturing print is followed by a disappointing ISM services survey and a soft jobs report later this week.

Valuations are rosy but earnings keep growing

This year’s rally has pushed major stock indices to ‘expensive’ territories not only from a price perspective but also relative to the value they are offering. Currently, the S&P 500 is trading at 20.7 times what analysts project earnings to be over the next twelve months multiples only seen during the pandemic and dot-com bubble.

On the one hand, valuations so stretched should ring alarm bells over an impending correction. However, for now, it seems that investors have been attributing higher multiples to corporate earnings constantly beating expectations. Meanwhile, Nvidia’s stellar Q1 earnings restated once again that growth in the AI space has yet to peak, partially justifying the notion behind higher multiples.

Levels to watch

Despite a minor setback in the past few sessions, the US 500 stock index has been recording consecutive all-time highs in 2024, repeatedly defying overbought signals. Considering that we are currently trading near all-time highs, the Fibonacci extensions of the latest severe downtrend could provide some potential future resistance areas.

To the upside, the price could revisit its all-time high of 5,350 before it challenges 5,481, which is the 150.0% Fibonacci extension of the 4,817-3,489 downtrend.

Alternatively, bearish actions could encounter support at the 123.6% Fibo of 5,130 ahead of the latest deflection point of 4,925.