Finance
Why stocks still ‘have plenty of room’
Investors are taking the bull by the horns.
That’s the sentiment gripping Wall Street as stocks hit record highs and the market heads for its best month of the year.
A late surge in recent trading saw the Dow Jones Industrial Average (^DJIA) close above 40,000 for the first time on Friday – a milestone that comes just 874 trading days after the Dow closed above 30,000 for the first time.
The blue chip index rose 1.2% this week, while the S&P 500 (^GSPC) and Nasdaq (^IXIC) both posted their longest weekly winning streaks since February.
“Psychologically speaking, it’s amusing,” JPMorgan Asset Management’s Jack Manley said of the milestone in Yahoo Finance’s ‘Morning Brief’.
“The rally feels good because the macro data is quite good,” he said.
Goldman Sachs (GS), Microsoft (MSFT) and UnitedHealth (UNH) were the three largest contributors to the Dow Jones rise from 30,000 to 40,000.
And the composition of the Dow Jones looks different than during previous milestones. The index recently replaced Walgreens (WBA) with Amazon (AMZN), giving the index its current composition.
This week’s softer inflation pressures helped strengthen the case for the Federal Reserve to cut rates before the end of the year, as more investors bet on a soft landing.
In a note to clients this week, Truist co-chief investment strategist Keith Lerner wrote that the recent rally is a “healthy sign and typical feature of a bull market,” suggesting “upside potential remains.”
And Lerner is not alone. Top Wall Street strategists tell Yahoo Finance that the run is far from over, although the ride ahead could be bumpy for investors.
“The screens are green and the sky is blue… there is more upside,” Brian Belski, chief investment strategist at BMO Capital Markets, told Yahoo Finance. “But that doesn’t mean stocks will be linear forever. We are going to see some kind of normal correction and that is a better buying opportunity.”
Belski warns that a bigger pullback than the 5.5% drop earlier this year is likely before interest rates return to higher levels. He raised his year-end forecast for 2024 to a Street high of 5,600; the S&P 500 closed just above 5,300 this week.
“The fourth quarter in particular, especially after the election, will do very well,” Belski added.
A growing list of strategists have raised their S&P year-end targets. As it stands now, more than half of the strategists tracked by Yahoo Finance have a year-end target of 5,300 or more.
Manley expects the market to gain another 5 to 10% from current levels as long as “the economy does well” and profits “catch up.”
“Big tech names have really done their best, but we need the rest of the index to play along too,” Manley said. “That’s an outdated story, and I think it helps to lift the market just a little bit higher.”
Strong gains are a key part of the Street’s bullish story.
As of Friday afternoon, the S&P 500 is on track for earnings growth of 5.7%, the highest earnings growth rate since the second quarter of 2022, according to FactSet. Looking ahead, analysts expect annualized earnings growth of 9.2% for the current quarter, and 11.1% for fiscal 2024.
Newton Investment Management Chief Investment Officer John Porter told Yahoo Finance he expects the earnings improvement to continue beyond big tech, leading to a broader rally.
Of the 30 best-performing stocks in terms of earnings this season, only five were from the technology sector, according to data compiled by Bespoke Investment.
“The resilience of the market despite much more modest expectations for rate cuts is very impressive,” Porter said of the 2024 rally. “As long as the market continues to feel that the Fed’s next step is a rate cut, I think there will be good support is for the broad market.”
While it’s up for debate how much higher stocks can rise from this, Carson Group’s Ryan Detrick wrote in a message on X that based on historical analysis, stocks rose an average of 20% each time in the year after the Dow Jones reached 10,000, 20,000 and 30,000 points.
Looking for value stocks during the Dow Jones’ record run? Value stock veteran Jonathan Boyar reveals some of his top picks to Yahoo Finance Executive Editor Brian Sozzi in a new episode of the Starting bid podcast. Listen in below.
Seana Smith is an anchor at Yahoo Finance. Follow Smit on Twitter @SeanaNSsmith. Tips about deals, mergers, activist situations or something else? Email seanasmith@yahooinc.com.
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