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The main reasons why the stock market will climb further involve macro issues and investors’ sentiment. On the macro front, the U.S. economy continues to hum along and is likely to continue to do so for at least two or three years. Moreover, inflation is expected to continue slowing down, enabling the Fed to refrain from many more rate hikes. And finally, investors’ sentiment appears to have reached a positive turning point this month, and the Street’s sentiment is likely only to continue to improve meaningfully going forward.
Let’s take an in-depth look at three main reasons why the stock market will climb further over the next two years.
The U.S. Economy Remains Strong and Is Likely to Stay Resilient
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As I pointed out in a recent column, Washington’s estimate of U.S. first-quarter GDP growth was recently revised upward to a real, annualized rate of 2%. And “as of June 30, the Fed was estimating, based on recent economic data, that GDP had jumped by a real, annualized rate of 2.2% in the second quarter.”
Driven by continued, strong consumer spending trends, those are impressive growth figures for a mature economy like America’s. And with the job market remaining tight and ” employees’ wages.. expected to jump 4.4% this year and another 4% in 2024,”consumers’ consumption — “the straw that stirs the drink” — is likely to remain strong through at least mid-2025, barring a “black swan” event.
Additionally, government’s infrastructure spending and the energy revolution, both of which are meaningfully positive for the economy in general and the labor market in particular, will also put upward pressure on economic growth for at least the next two years.
Inflation Is Expected to Keep Declining and the Fed Is Likely to Remain Tame
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Speaking on CNBC on July 3, Fundstrat’s well-known analyst, Tom Lee, predicted that the Consumer Price Index’s 12-month increase may have dropped “to 3%” in June from 4% in May. Such a reading, he stated, “really takes the pressure off the Fed.”
What’s more, as I pointed out in the previous column, I believe that ” the Fed has many ambitions, including helping Wall Street, ensuring financial stability, avoiding recessions, and pleasing America’s most powerful politicians.”
Since inflation is expected to keep declining and the Fed is likely to want to avoid a recession, particularly ahead of the 2024 election season, I believe that it will not raise rates more than one or two times for the rest of 2023. Additionally, after the banking mini-crisis in March, the central bank is likely to want to avoid raising rates much further to prevent more financial institutions from failing, putting pressure on the financial system and undermining voters’ confidence in the economy ahead of the elections.
Given these points, the Fed is likely to remain quite dovish going forward, making investors more bullish and causing stocks to surge.
Sentiment Has Reached a Positive Turning Point
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From June 29, when Washington revised its Q1 GDP growth estimate up to 2%, until July 3, the S&P 500 went on a tear, jumping nearly 3% in just three trading days. According to Tom Lee, the Fundstrat analyst, breadth, which the bears have been pointing at as a huge weakness of this bull market, was actually extremely positive during the week of June 29. In fact, breadth was so positive during that week that the market broke a record for the best weekly advance/decline ratio in history, Lee reported!
Additionally, it is my belief that (listening to many hours of Bloomberg TV and CNBC last week), the GDP revision broke the bears’ proverbial back. Few bears came on the stations while I was listening to them, and those few that were willing to appear, for the most part, sounded weak and unsure of themselves.
Taking all three of these factors together, I believe it’s clear that investors’ sentiment has turned a corner, greatly increasing the likelihood that the stock market will climb further going forward.
On the date of publication, Larry Ramer did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Larry Ramer has conducted research and written articles on U.S. stocks for 15 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been PLUG, XOM and solar stocks. You can reach him on Stocktwits at @larryramer.
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