Stocks have been on fire this year.
YTD, the S&P 500 is up 23.1%.
What’s interesting is that the S&P is on pace to close up 20% or higher for the second year in a row. (2023 was up 24.2%.)
That’s a feat rarely seen in the past.
I have seen others state the same. But they do so as a cautionary tale and tie it to the dot-com bubble.
That’s all well and fine.
But I see it a bit differently.
The dot-com bubble ‘burst’ in 2000 when the S&P dropped by -10.1% for the year. (That was also Y2K, which caused plenty of panic leading up to it, but came and went pretty much without a hiccup.)
The point is, the dot-com bubble was preceded by the dot-com (technology) boom.
In 1995 the S&P was up 34.1%.
In 1996 it was up 20.3%.
That was the first time it was up 20% or more for two years in a row since 1954-55.
So, what happened in 1997? It was up another 31.0%.
1998? Up another 26.7%.
And in 1999, it was up 19.5%.
A spectacular rally that lasted 5 long, glorious years.
Yes, the dot-com bubble arrived in 2000. But not before people got rich over the preceding 5 years with a 220% increase in the index, while plenty of individual stocks were up several hundred percent to several thousand percent.
And I’m here to say that I believe we could possibly see the same thing again now. Maybe 5 years or more of boom times – for similar reasons, and some unique to the present day.
Will History Repeat Itself?
The tech boom back then saw everybody go nuts for technology stocks, driven by the internet and dot-com companies.
It was new and exciting. And the internet was forecast to change the way people shopped, did business, and interacted with people.
The promise was real, as we now know.
So, what’s the parallel?
The modern technology boom is being driven by Artificial Intelligence (AI).
And it’s forecast to be just as transformative as the personal computer, the internet and the mobile phone. And it’s expected to touch virtually every industry in some way shape or form, as well as impact ordinary lives.
The AI trade has worked so well for a reason -- because the AI boom is real, and is supported by real earnings, and real growth potential.
But the current rally we’re seeing in stocks goes beyond just big tech.
And there are plenty of other catalysts that make the market outlook even more exciting.
Continued . . .
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Interest Rate-Cutting Cycle Has Begun
The latest Consumer Price Index (CPI), Producer Price Index (PPI), and Personal Consumption Expenditures (PCE) index, shows that inflation continues to ease.
Core (ex-food & energy) CPI (retail inflation) is now at 3.3% y/y, core PPI (wholesale inflation) came in at just 2.2%, and core PCE (the Fed’s preferred inflation gauge) came in at 2.7%.
Fed Chair Jerome Powell said he was “feeling good” about the economy and that they’ve made “significant progress on inflation,” while maintaining a “strong, but not overheated” jobs market.
He also reiterated that he believes inflation is on a “sustainable path back to 2%.”
That’s why the Fed has cut interest rates by 75 basis points, so far this year (50 bps in September and another 25 bps in November), putting the Fed Funds midpoint at 4.63%.
They’re also expected to cut rates by another 25 bps when they meet again in December.
That’s in line with the Fed’s outlook, which forecast rates would get as low as 4.4% by year’s end.
Moreover, they are expecting to cut by another 100 bps by the end of next year, putting rates at 3.4%.
Lower interest rates are likely to help businesses of all sizes, but they should have a bigger impact on smaller-cap companies as they typically carry higher debt, and at less favorable terms. And the savings will help increase their bottom lines.
Breadth Expansion
This is also why a breadth expansion of the current bull market appears to be underway.
I expect large-caps and tech/AI names to continue to thrive for all of the reasons described above.
But I expect some of those profits to find their way into other industries and stocks as lower interest rates make them look more attractive. That should lift the small-cap index and the mid-cap index. And should allow for a big game of catch-up for those ignored categories.
But it should also continue to lift the Dow, the Nasdaq and the S&P 500, as other stocks in those indexes will get a chance to benefit more broadly as investor dollars start giving those more attention.
And that’s very bullish for the market.
Plus, as interest rates continue to fall, you can be sure plenty of money tied up in money markets will find their way back into equities, further lifting stock prices.
The Outlook Is For Growth
The U.S. isn’t the only one cutting interest rates.
In October, the European Central Bank (ECB) cut rates by 25 basis points for the third time this year (with more cuts expected by year’s end).
China also cut their lending rates by 25 basis points. That applies to both the one-year and five-year loan rates. That comes on top of a large stimulus package they announced totaling 10 trillion yuan ($1.4 trillion). China’s Hang Seng Index has surged more than 14% since the announcement.
The Bank of England (BOE) also cut rates by a quarter point earlier this month. This was their second rate cut this year, so far.
Interest rate cuts and stimulus measures around the world are all bullish for the market since this is essentially a global economy.
The U.S. has been the key economic driver over the last several years, as often is the case, and will likely continue to be. But with China being the second-largest economy and the European Union the third-largest, supportive economic measures will further help the global economy, which includes the U.S.
Extension Of Tax Cuts, And New Tax Cuts
With the Presidential election behind us, we already know some of what’s on the economic agenda for 2025 – and that’s tax cuts.
The 2017 tax cuts are set to expire in 2025, if not renewed.
But with a unified government (the executive branch and both chambers of the legislative branch controlled by the same party), it looks like the extension of the tax cuts will be one of the first orders of business.
That goes for extending the corporate tax cuts (currently at 21%), and possibly doing one better by lowering them to 15%.
Individual tax cuts are to be extended as well.
That removes a potential negative if they weren’t renewed. And adds in an additional positive if they are lowered even more. That should add even more growth potential to the economy. And a growing economy goes hand in hand with a bull market.
Moreover, personal incomes are near all-time highs. An important point when you consider that 70% of our GDP is driven by consumer spending.
Upward Trend Of Earnings Estimates
Let’s remember that earnings are the key driver of stock prices.
And the earnings picture is one of improvement.
Q3’24 earnings are pacing at 7.6%.
Q4’24 earnings are expected to be up 7.7%.
Q1’25 earnings are expected to be up 11.2%.
And Q2’25 earnings are expected to be up 12.5%.
Stocks Are Undervalued
Let’s also not forget that valuations are down.
While the P/E ratio for the S&P has risen from their lows, they are still down sharply from 2021’s peak, and are below where they were the last time stocks were anywhere near this level.
And that makes stocks a bargain.
Then when you factor in the increasing earnings estimates just mentioned, stocks look even more undervalued.
Do What Works
So how do you fully take advantage of the market right now?
By implementing tried and true methods that work to find the best stocks.
For example, did you know that stocks with a Zacks Rank #1 Strong Buy have beaten the market in 29 of the last 36 years (an 81% win ratio) with an average annual return of more than 24% per year? That's more than 2 x the S&P, including 4 bear markets and 4 recessions. And consistently beating the market year after year can add up to a lot more than just two times the returns.
It also killed in 1995 with a 52.6% gain; 1996 with 40.9%; 1997 with 43.9%; 1998 with 19.5%; and 1999 with 45.9%. It was also up in 2000 by 14.3% while the S&P was down.
Did you also know that stocks in the top 50% of Zacks Ranked Industries outperform those in the bottom 50% by a factor of 2 to 1? There's a reason why they say that half of a stock's price movement can be attributed to the group that it's in. Because it's true!
Those two things will give any investor a huge probability of success and put you well on your way to beating the market.
But you’re not there yet, as those two items alone will only narrow down a field of 10,000 stocks to the top 100 or so. Way too many to trade at once.
So, the next step is to get that list down to the best 5-10 stocks that you can buy.
Proven Profitable Strategies
Picking the best stocks is a lot easier when there’s a proven, profitable method to do it.
And by concentrating on what has proven to work in the past, you’ll have a better idea as to what your probability of success will be now and in the future.
Of course, this won't preclude you from ever having another losing trade. But if your stock picking strategy picks winners more often than losers, you can feel confident that your next trade will have a high probability of success.
Here are a few of my favorite strategies that have regularly crushed the market year after year.
New Highs: Studies have shown that stocks making new highs have a tendency of making even higher highs. And this strategy proves it. The alignment of positive price action and strong fundamentals creates all the necessary conditions to see these stocks soar to even greater heights. Over the last 24 years (2000 through 2023), using a 1-week rebalance, the average annual return has been 36.3% vs. the S&P’s 7.0%, which is 5.2 x the market.
Small-Cap Growth: Small-caps have historically outperformed the market time and time again. Often these are newer companies in the early part of their growth cycle, which is when they grow the fastest. This strategy combines the aggressive growth of small-caps with our special blend of growth and valuation metrics for explosive returns. Over the last 24 years (2000 through 2023), using a 1-week rebalance, the average annual return has been 44.9%, beating the market by 6.4 x the returns.
Filtered Zacks Rank 5: This strategy leverages the Zacks Rank #1 Strong Buys, and adds two time-tested filters to narrow the list of stocks down to five high probability picks each week. Over the last 24 years (2000 through 2023), using a 1-week rebalance, the average annual return has been 44.7%, which is also 6.4 x the market.
The best part about these strategies (aside from the returns) is that all of the testing and hard work has already been done. There’s no guesswork involved. Just point and click and start getting into better stocks on your very next trade.
Where To Start
There’s a simple way to add a big performance advantage for your stock-picking success. It's called the Zacks Method for Trading: Home Study Course.
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Zacks Method for Trading covers the investment ideas I just shared and guides you to better trading step by step, plus so much more.
You'll quickly see how to get the most out of the proven system that has more than doubled the market for over three decades. Discover what kind of trader you are, how to find stocks with the highest probability of success, and how to trade them so you can consistently beat the market no matter where stock prices are headed.
You’ll get the formulas behind our top-performing strategies suited for a variety of different trading styles.
The best of these strategies produced gains up to +62.6% in 2023 while the S&P 500 gained +26.2%.¹
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Thanks and good trading,
Kevin
Zacks Executive VP Kevin Matras is responsible for all of our trading and investing services. He developed many of our most powerful market-beating strategies and directs the Zacks Method for Trading: Home Study Course.
¹ The individual strategies mentioned herein represent only a portion of the ones covered in the course.
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