Two opposing forces will shape stock performance for the rest of the year

Markets are navigating mixed signals that will likely drive stock performance through the rest of 2024.

 

On one side, investors are noting a cooling economy, with a recent rise in the unemployment rate igniting fears of a potential recession in the US. On the other side, Wall Street remains optimistic about consistent earnings growth, which could continue to boost stock prices.

 

"While the market's focus in the first half of the year was primarily on inflation, attention is quickly shifting to growth risks in the second half, especially given high earnings expectations for the latter part of 2024 (+9%) and 2025 (+14%)," JPMorgan analysts stated in a note on Thursday.

 

They suggest that the market's dynamic is now centered on a "two-sided debate," with concerns about economic growth and high stock valuations taking center stage.

 

A recent unexpected spike in the unemployment rate, the triggering of the Sahm Rule recession indicator, and a Federal Reserve that has maintained restrictive monetary policies for potentially too long have heightened investor concerns about an impending recession.

 

This scenario could lead to a significant drop in stock prices, as was evident earlier this week when the Nasdaq 100 extended its monthly decline by over 10%, and some major tech stocks saw double-digit percentage losses in a single day.

 

"We believe the current market pullback is primarily driven by fears related to weakening growth and the reevaluation of recession probabilities," the JPMorgan strategists wrote.

 

This week, the bank increased its recession probability by the end of the year to 35% from 25%, while Goldman Sachs raised its estimate to 25% from 15%.

 

Analysts noted that the stock market still faces potential downside risks, as valuations remain high and the Fed shows little urgency in reducing interest rates.

 

"Although the recent market correction reduced some excess, equity positioning and valuation still pose risks, especially if growth continues to decelerate and the Fed remains unresponsive," JPMorgan said.

 

Despite signs of a slowing US economy, corporate earnings continue to grow, which could help stabilize stock prices and potentially drive them higher.

 

Of the 88% of S&P 500 companies that have reported second-quarter earnings so far, 79% have exceeded profit estimates by a median of 6%.

 

Year-over-year earnings are up nearly 12%, significantly surpassing earlier expectations for 9% growth.

 

Additionally, forward earnings expectations reached an all-time high last month, according to Yardeni Research data.

 

The stark contrast between recession fears and a potential stock market slowdown, alongside surging corporate earnings, is evident.

 

Google search trends for the term "recession" have peaked since June 2022, when high inflation and aggressive rate hikes worried investors about an economic downturn.

 

Conversely, mentions of an economic downturn in corporate earnings calls have dropped to their lowest level since the third quarter of 2022, according to Bloomberg data.

 

"The S&P 500 is up 10.5% year-to-date. We anticipate some sideways movement in the coming months and are cautious about emerging risks in the Middle East, but we remain optimistic about US economic growth and US equities," Ed Yardeni of Yardeni Research noted in a client note earlier this week.

 

JPMorgan analysts highlighted a final wildcard for investors: the new uncertainty about the election following Kamala Harris's emergence as the presumed Democratic nominee.

 

"Her late entry into the Presidential race adds another layer of complexity for investors evaluating election risks, as the race between the candidates tightens and their policy platforms remain uncertain," the analysts wrote.