The stock rally is now at an all-time high, pushing the Dow Jones Industrial Average and S&P 500 to new highs. Analysts have been talking lately about “herd behavior,” which usually means that the market keeps going up and no one is sure why.
The S&P 500 closed the week up 0.9%, and the Dow rose 1%, both hitting Friday records and posting gains for the sixth straight week. The Nasdaq Composite Index also rose 0.8%.
Investment banking income rose by more than 20% on average at major banks in the last quarter. “We are seeing unusually high demand from our clients,” Goldman Sachs CEO David Solomon said on Tuesday’s earnings call. Morgan Stanley’s chief financial officer, Sharon Yeshaya, expects “a multi-year recovery in the capital markets.”
“The return of herd behavior in deal-making has been a key theme as investment banking revenues rise at most large banks,” said Adam Turnquist, chief strategist technical at LPL Financial, according to Barron’s.
The tone of bank earnings releases has taken a turn for the better, Turnquist said. He noted that this is the first quarter in more than a year in which the phrases “economic growth” and “soft landing” appear more often than “recession” and “economic decline.”
Recent economic data has been very positive. Retail sales rose 0.4% last month, a better-than-expected result. The Federal Reserve appears to be on track to cut interest rates again in November by a quarter of a percentage point.
But with the S&P 500 trading at 22 times expected earnings over the next four quarters, valuations are in a much more optimistic mood. And some economic signs are not very good. There are indications that users are withdrawing in some areas.
American Express shares fell on Friday, as its customers, even the wealthy, are feeling “cautious” these days, according to the company’s chief financial officer. These feelings are shared by companies that serve different social classes, including Domino’s Pizza.
Volatile consumer sentiment and high valuations mean stocks will have to rally cautiously for the rest of the year. With more third-quarter earnings released in the coming weeks, investors should keep an eye on whether analyst estimates for 2025 rise or fall.
Currently, analysts expect earnings for S&P500 stocks to rise 15% in 2025. If that number falls, valuations could decline as well.
Some analysts see another trigger on the horizon. “More herd behavior is likely to emerge after the US election,” wrote Steve Caprio, a Deutsche Bank strategist.
2024-10-19 16:15:00
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