When Will the Market Peak?

So far, the US stock market has surprised investors in 2024. Entering the year burdened by fears of overvaluation and a potential recession on the horizon, the S&P 500 has demonstrated stronger-than-expected momentum by delivering returns of 7.4% YTD.

The question, though, is when will the market peak and how much room stocks could have left to run before reaching a high water mark?

What Factors Could Still Send the Market Higher?

The most positive piece of data for the stock market’s continued run is the fact that corporate earnings still appear to have room to run.

Analysts project earnings growth of about 10.9% for the full year of 2024. Assuming stock prices rise by a roughly similar amount, this would result in a more or less an average year of positive returns.

Another positive factor for the broader economy has been strong growth in productivity. In Q4, for instance, productivity growth reached 3.2%. This trend has offset some of the higher labor costs companies have been forced to accept due to the tight labor market.

The recent round of Q4 earnings reports, especially from large tech companies, have also given the market a renewed sense of optimism.

More than three-quarters of S&P 500 companies delivered earnings surprises, and the tech giants have continued their forward march into higher levels of profitability. As such, stocks look more attractive than analysts originally expected going into 2024.

Market Headwinds

Though the market could still have steam left in it, obstacles to further advances are beginning to appear.

To begin with, resurgent inflation may put downward pressure on stocks by threatening higher input costs and making it more likely that the Federal Reserve will keep interest rates higher.

A prime example occurred earlier this week when the NASDAQ fell by 100 points in response to hotter-than-expected inflation data for the month of February.

It’s also worth noting the recent sharp disparity between the handful of top-performing stocks and the rest of the market.

In 2023, the S&P 500 gained over 26%, resulting in excellent returns for investors who bought and held index funds. 76% of that gain, however, was attributable to just seven mega-cap tech companies at the very top of the index.

While investors have good reasons to be bullish on these fast-growing businesses, the sheer degree to which a small handful of stocks have influenced the market produces a degree of concentration risk.

In addition, these companies tend to trade at much higher value multiples than the broader S&P 500. If growth slows or investors become unwilling to continue bidding these stocks to higher and higher prices, the result may very well be a sharp downward correction of the type not seen since 2022.

A final area of concern for the market is the growing potential of a debt bubble. Corporate defaults rose in 2023 amid a tighter financing landscape, raising concerns about the overall level of corporate debt.

Consumer debt has also risen sharply, with Americans now holding $17.5 trillion in accumulated household debt. This includes a record $1.13 trillion in credit card debt.

As a result, the economy faces the risk of a slowdown as both businesses and consumers have a more difficult time accessing credit and more capital is allocated to servicing existing debts.

What Technical Indicators Forecast Now

While technical indicators are less important to the performance of the stock market than earnings growth and overall macroeconomic trends, they may be able to shed some further light on the market’s next moves.

One indicator that investors may want to pay attention to is the relationship between the Dow Jones Industrial Average (DIA) and the NASDAQ 100 (QQQ). The former is made up mostly of legacy industrial companies, and the latter focuses more on high-growth tech firms.

When vast disparities emerge between their respective performance, however, it can be a sign of trouble. The most notable instance of this occurred in 2000, just before the infamous dot-com bubble burst.

Worryingly, the dynamics between the two once again seem to indicate that a bubble could be forming. Over the last 12 months, DIA has returned a very healthy 23.5%. QQQ, however, has generated returns of 48.7% over the same period, a spread of more than 25%.

Ordinarily, such a ratio may not catch investors’ attention. It’s worth noting, however, that similar dynamics to the dot-com bubble may well be playing out in the stock market today due to investor enthusiasm for generative AI.

Jeremy Grantham, an investor who became famous for predicting the dot-com bubble’s burst, has recently pointed out that the sky-high valuations produced by the AI surge are likely unsustainable.

While there are no guarantees that AI is in a bubble, it would be far from the first new technology to drive stock prices to unreasonable heights before resulting in a selloff.

So, When Will the Market Finally Peak?

While it’s very difficult to pinpoint an exact moment when the market will peak, a combination of strong headwinds makes a peak sometime this year appear likely.

Though the market probably still has some room left to run, it probably won’t be able to outpace the combination of high valuations, higher interest rates, persistent inflation and potentially weaker consumer spending caused by rising debts indefinitely.

The interest rate environment is likely to be especially important for the possible emergence of a new bear market. The Federal Reserve has previously expressed its desire to cut rates, a move meant to stimulate growth.

With inflation now staying stubbornly high, however, the central bank will likely have less latitude to reduce rates. The result is probably a situation in which rates are kept at elevated levels long enough to actively curtail growth.

At the end of the day, there are no guarantees as to when or how the current bull market could peak. This is why one of the most fundamental pieces of investment wisdom is to avoid market timing. Holding quality stocks and indices through a variety of market conditions has historically been the key to long-term returns.

Even if prices do peak and then fall off this year, the decades-long trend of stock market growth will almost certainly continue in the coming years and deliver new record highs in the future.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.