Global markets surge as $8 trillion rally faces key tests

As global markets experience an unprecedented rally, accumulating an astounding $8 trillion in value over recent months, analysts are closely monitoring the potential challenges that lie ahead. This surge has been driven by a combination of factors, including robust corporate earnings, easing inflation concerns, and a resilient consumer base. However, as optimism reigns, questions arise about the sustainability of this growth amid shifting economic conditions according to a detailed report by Bloomberg.

Economic indicators and market performance

The rally has been particularly pronounced in major indices, with the S&P 500 and NASDAQ Composite posting significant gains. The S&P 500 has risen approximately 19 per cent this year alone, while the NASDAQ has surged over 30 per cent. This performance can largely be attributed to strong earnings reports from technology giants and other key sectors. Companies such as Apple and Microsoft have exceeded expectations, contributing to investor confidence.

But the tide may be turning as analysts slice their expectations for third-quarter results. Companies in the S&P 500 are expected to report a 4.7 per cent increase in quarterly earnings from a year ago, according to data compiled by Bloomberg Intelligence. That’s down from projections of 7.9 per cent on July 12, and it would represent the weakest increase in four quarters, BI data show.

Due to these factors, market experts caution that the rally may be tested by several factors. Managing interest rates remain a significant concern, as central banks worldwide signal potential measures to combat inflation. The Federal Reserve's recent comments suggest that while inflation is easing, it is not yet under control. This could lead to increased borrowing costs, which may dampen consumer spending and corporate investment.

“The earnings season will be more important than normal this time,” said Adam Parker, founder of Trivariate Research. “We need concrete data from corporates.”

Additionally, geopolitical tensions i.e., the Iran-Israel dispute and supply chain disruptions continue to pose risks to market stability. The ongoing conflict in Ukraine and trade tensions with China have created more uncertainties that could impact global trade and economic growth. Analysts are urging investors to remain vigilant as these external factors could influence market dynamics in the coming months.

Investor sentiment and future outlook

History appears to side with the pessimists, too. Since 1945, when the S&P 500 gained 20 per cent through the first nine months of the year, it posted a down October 70 per cent of the time, data compiled by Bespoke Investment Research show. The index gained 21 per cent this year through September.

Further, reports from major companies start arriving this week, with results from Delta Air Lines Inc. due Thursday and JPMorgan Chase & Co. and Wells Fargo & Co. scheduled for Friday.

Bar has been lowered

Still, there’s reason for optimism, specifically a lowered bar for earnings projections that leaves companies more room to beat expectations.

“Estimates got a little bit too optimistic, and now they’re pulling back to more realistic levels,” said Ellen Hazen, chief market strategist at F.L.Putnam Investment Management. “It will definitely be easier to beat earnings because estimates are lower now.”

Further it is to be noted that the Fed’s easing cycle, which has historically been a boon for US equities. Since 1971, the S&P 500 has posted an annualized return of 15 per cent during periods in which the central bank cut rates, data compiled by Bloomberg Intelligence show.