Each quarter, Blooming Tree Wealth Management hosts a cost-free webinar open to everyone. On Thursday, May 9, we held the BTWM Q2 Virtual Lunch Webinar, and asked attendees to submit questions via email and chat. One of three questions we received was, “What’s the worst thing that could happen?”
This question is common, but should we be fearing the current state of the market, or look optimistically for opportunities?
A question I never receive, and one that may be more important to ask, is “What’s the best thing that could happen?” When answering this question, it’s hard not to have a bullish perspective heading into the second half of 2024.
There are several key signs the economy is headed in a positive direction, including:
More billion-dollar construction projects than ever before.
Key industries poised for growth, including automation, technology, and electric vehicles.
Q1 earnings consistently beat expectations.
The economy continues to expand.
Rate cuts remain an option if or when the economy shows signs of slumping.
Housing expenses partly responsible for the rise in inflation are bound to cool off.
In addition to discussing signs the economy is moving in the right direction, we also talked about the following topics during the Webinar:
- Misery Index
- Inflation
- The Fed
- What’s Worth Owning
- Fastest Growing Industries
- Infrastructure Projects
- Pessimism and Your Portfolio
The question “What’s the worst thing that could happen?” comes from pessimism and bearish investor sentiment. Pessimism will always factor into the economy and stock market, but not always in the way you might think. Pessimism is known as a contrarian indicator, meaning that when everyone else is selling, smart, seasoned investors begin buying at a discount.
When optimism about the stock market falls to new lows, look beyond the fear and refresh yourself on what causes a stock to gain value. Two ways a company’s stock increases in value are P/E expansion and earnings growth.
P/E Expansion
What investors are willing to pay for a dollar’s worth of earnings determines the ceiling for a company’s stock price. If investors are willing to pay more than before, stock prices can rise higher with the same level of earnings.
Currently, the average S&P 500 P/E Ratio is near the high end of its normal range at 24.79 (12/31). This is its highest since June of 2021. Historically speaking, investors don’t pay this much for a dollar’s worth of earnings.
Getting back to a more stable average can happen in one of three ways:
1. Prices collapse
2. Earnings grow
3. A combination of the above where prices flatten out and earnings rise.
Earnings Growth
Earnings growth, which drives the market, comes from many different efforts, including increasing margins (by enhancing productivity and efficiency), capturing more market share, or simply through share buybacks. If there is one reason to feel as though the stock market glass is half full, it’s that earnings are headed toward record highs!
Although there are always things to fear when it comes to the economy, especially in an election year, there may be more things to be excited about than worry about.
Have questions about the market and your retirement strategy? Let’s talk! Contact me at ryan.oconnell@bloomingtreewm.com.
Webinar Quotes
“American corps are doing their part, and kicking butt.”
“Own the things that are growing faster than their peers, and don’t be afraid of the volatility that’s inherent in owning stock.”
“When pessimism continues – be a fountain and stay away from the drains.”