VIDEO: How We're Getting Ready for Market Disappointment Next Week
The chorus calling for slower rate cuts is growing, risking market disappointment.
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In today’s Daily Rundown video, with the S&P 500’s valuation back near multi-year highs, Chris Versace discusses this week’s market melt-up and how the Pro Portfolio is approaching things ahead of the Fed’s meeting next week.
He also breaks down Fitch’s 2024-2026 rate-cut forecast and how that supports our concern for a market disappointment next week.
Transcript
CHRIS VERSACE: Hey, folks. Chris Versace here, Friday, September 13th, or Friday, the 13th for all those of you, that might be a little superstitious. But so far, superstition isn't in the market. Today we have another positive day overall for the stock market. We can attribute that to some lifted guidance from Oracle that's continuing to lead to a rebound in several of our tech holdings. But we've also got good results out of RH.
And for the most part, we've had some pretty favorable comments across the array of investor conferences that have been held this week. And we've shared some of those observations with you earlier this week. And yesterday that led us to boost our price target and the shares of Axon to 4.15, still keeping our two rating intact. But we also laid out what we would be looking for to potentially revisit that.
And then this morning, we upgraded the shares of United Rentals to a two rating from three, largely predicated on far better construction industry activity and clarity or visibility over the next, let's say, at 2025 to 2026 as the infrastructure and non-residential market continues to improve. And the thinking in our part that the housing market should start to rebound as the Fed moves deeper into a rate cutting cycle as we talked about in the note. If you take a look at the consensus EPS expectations for United Rentals for 2025, they're not really giving a lot of credence to that. There could be some upside. Again, please read the note. We walk through all the math in there, and I think you'll find it particularly interesting.
So stepping back, because it is Friday, we would say that the market's move higher has moved most of the pain that we saw last week, the first week of September. All in all, pretty positive for the portfolio. We've seen some really nice moves in applied materials. Remember, we picked up more shares there last week. But also Amazon, Axon, as I just mentioned, Builders FirstSource, Dutch Bros has started to perform. We talked about that in yesterday's video.
But also, we saw some really nice movement in Marvell, Nvidia and Universal Display. And of course, Trade Desk has also been chugging along nicely this week. So all in all, very good things for the portfolio this week.
But I have to say, that as much as we're enjoying that, we are also recognizing that the week's strength in the market has pushed the S&P 500's PE multiple back near that multi-year high that we continue to talk about around 23.4 times. It's a little bit below it, but it has rebounded closer to that level than not.
And this is signaling that the market might be short-term overbought. Helene Meisler is watching the 56.50 level on the S&P 500. And if you're looking at a recent quote on that market barometer, you're going to say, oh, that's less than 1% away. And that is correct.
And as we think about all of that, we have to remember that this is all happening ahead of the Fed's policy meeting next week. And there is a growing chorus of folks that sees the Fed taking a more measured approach to rate cuts than the market consensus depicted in the CME FedWatch tool says.
Now, as of now, the CME FedWatch tool still sees about 100 basis points in rate cuts before the end of this year, and 225 in cuts by June of 2025. So let that sink in as I share that even Fitch now expects the Fed will enact a cumulative of 250 basis points in rate cuts in 10 moves, so an average of 25 basis points, over the next 25 months, over the next two plus years. And when we break down what Fitch is looking for, it says 50 basis points between the September meeting, next week, and the December meeting. So a total of 50 basis points this year, another 125 basis points spread across 2025, and another 75 in 2026.
Now, that's on par with our thinking for 2024, two rate cuts. But it's way slower than what the market sees for a cumulative of those 225 basis points by June of next year. So while we're enjoying this week's move, we are going to remain on the prudent path with the portfolio, because of the risk. of a market disappointment next week.
We've talked about this in the past, we've seen it in the past. Whenever the market has to reset expectations when it comes to Fed rate cuts, because they're out over their skis, it tends to be a little messy in the market. So what will we be doing? Early next week we'll be sharing levels where we'd be looking to pick up shares that are on our shopping list, but also across the wider portfolio.
And ahead of the Fed concluding its policy meeting on Wednesday, we aim to have one, maybe two more names in the bullpen. So if the market is indeed disappointed with what the Fed has to say, it has to rethink its rate cut expectations and trades off. As the dust settles, we'll be able to make some moves very similar to what we did in August. That's our thinking, that's our plan.
And as a result, well, you know my message, we want to make sure that you continue to-- continue-- excuse me. Let's start that over again. Reverse. --we want to make sure that you continue to check your alerts and your emails, because we want to make sure you're getting our latest thinking, as well as make any moves with the portfolio that we make.
So thanks for watching. Have a great weekend. And we'll see you back here on Monday.
