Volatile stocks stabilise in anticipation of job reports

Economic Outlook: Inflation at 3.4%, Earnings Rise 5.9%

Key Points

  • Inflation Decline: Consumer prices rose only 3.4% over the year through May, the lowest in three years, easing economic pressures.
  • Rising Earnings: S&P 500 companies’ profits grew by 5.9% in Q1 and are forecasted to increase by 8.8% in the current quarter.
  • Overvaluation Risks: The market’s forward price-to-earnings ratio of 21.2 exceeds the five-year average of 19.3, signalling potential overvaluation.
  • Potential Correction: Despite positive earnings, high interest rates and stock overvaluation could lead to a market pullback.
  • Goldman Sachs Picks: Goldman Sachs recommends Fox Corp. (FOXA) as a strategic investment, expecting a price target of $42 due to its competitive edge in media.

Inflation has been a hot topic recently, with many looking to the Federal Reserve for guidance. Fortunately, there’s good news on the horizon. Falling inflation rates allow the Federal Reserve to adjust its policies as needed. Over the twelve months through May, consumer prices increased by a mere 3.4%, marking the lowest tally in over three years. This decline is a welcome relief for consumers and investors, who have been grappling with rising costs. The reduced inflation rate suggests a stabilisation in the economy, potentially paving the way for more predictable financial planning and investment strategies.

Earnings on the Rise

Earnings reports have been painting a rosy picture for the market. In the first quarter, year-over-year profits for companies in the S&P 500 grew by an impressive 5.9%, according to FactSet. This upward trend is expected to continue for a while. Analysts are forecasting an 8.8% increase in earnings for the current quarter, which would be the most significant gain since the first quarter of 2022. Such robust growth indicates a healthy economic environment bolstered by solid consumer spending and corporate performance. For investors, this means more opportunities for growth and higher returns on their investments.

The Bear Case: Proceed with Caution

Despite the positive earnings outlook, some experts caution against overexuberance in the stock market. There’s a bear case to be made, with several points of concern. First, the market’s recent surge may have gone too far. According to FactSet, the forward price-to-earnings multiple stood at 21.2 as of July 3, which is considerably higher than the five-year average of 19.3 and the ten-year average of 17.9. This suggests that stocks may be overvalued, potentially leading to a market correction. Additionally, the Federal Reserve will likely keep interest rates higher for longer, with only one rate cut expected this year. Persistent inflation, as evidenced by the personal consumption expenditures price index, which was 2.6% for the twelve months through May, further complicates the economic landscape. Although this slightly improved from April’s 2.7%, it remains above the Fed’s target of 2%.

Are Stocks Headed for a Correction?

The debate rages on: are stocks headed for a correction? While recent earnings growth and falling inflation suggest a stable and growing economy, the overvaluation of stocks and the potential for prolonged high interest rates could trigger a market pullback. Investors must weigh these factors carefully, balancing optimism with caution. The current economic environment is complex, with promising opportunities and significant risks. Staying informed and adaptable is crucial for navigating these uncertain times.

Goldman Sachs’ Top Stock Picks for July

Amid these economic debates, Goldman Sachs has offered some guidance for investors looking to make strategic moves. For July, Goldman Sachs has identified 20-25 high-conviction stocks, including three new additions. One standout pick is Fox Corp. (FOXA), which encompasses Fox Network, Fox Sports, and Fox News. Goldman Sachs has set a price target of $42 within the next twelve months, up from its current price of under $35 as of Wednesday. The U.S. media industry is in a state of transition, facing increased competition and new distribution channels. However, Fox Corp. is favoured for its strong competitive position, particularly in sports and news, making it resilient to the cord-cutting trend. Trading at a discount to its peers, Fox Corp. holds underappreciated value in its strategic assets. Furthermore, Goldman Sachs estimates the company’s EBITDA to be 12% above Wall Street consensus by 2025, highlighting its growth potential.

Navigating the Investment Landscape

As we move through the latter half of the year, investors face mixed signals. Falling inflation and rising earnings provide a solid foundation for optimism. However, the overvaluation of stocks and the likelihood of prolonged high interest rates introduce a level of caution. For those looking to make informed investment decisions, staying abreast of market trends and expert analyses is essential. Goldman Sachs’ stock picks, such as Fox Corp., offer valuable insights into potential opportunities. Balancing these factors will be crucial to navigating the ever-changing investment landscape successfully.

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