Milan Cacic
August 03, 2023
Financial literacy Economy In the news News Weekly update Weekly commentaryIT'S EASIER TO SWIM WITH THE STREAM!
The below chart shows what the market expectations are for the Fed funds rate in the United States. As you can see, the market is predicting a pause in rates going forward and a cut in rates starting in March 2024. Overall, it’s more difficult for the market to go up in a rising interest rate environment. It's kind of like trying to swim against a river. Having said that, the reverse is also true – it's easier for stocks to go up in a declining interest rate environment. The simple reason is that consumers and corporations have more money to spend on personal items or growing businesses rather than spending on debt servicing.
Earnings are starting to grow again
Below is a chart of the earnings-per-share growth of the S&P 500 on an annualized basis. As you can see in 2022, earnings dropped as much as 27% year-over-year. But so far in 2023, we have had two consecutive quarters of year-over-year growth in earnings.
Historically speaking, earnings growth tends to go up for many years - not just quarterly. If we combine the fact that earnings are starting to grow again with the notion that rates in the United States should start to decline sometime next year, we create an environment that is ripe for the stock market to go up. Let's hope history repeats itself.
I've also included a piece from our CIBC Economics team entitled "Monthly world markets report ".
As always, if you have any questions, please feel free to give us a call at any time.
Have a great long weekend.
Milan