Q4 Earnings Season Will Take Stocks to New Highs

There are multiple indications the U.S. economic expansion is still strong, while the earnings season of S&P 500 companies is expected to have increased last quarter. Meanwhile, the Federal Reserve is unlikely to raise its benchmark rate again this year. Given these points, I expect U.S. equities to keep rising for the foreseeable future.

At this point, the outlook for interest rate cuts by the Federal Reserve is mixed. Specifically, some indications show reductions in the Fed’s benchmark rate could come in March or May, while other developments suggest the central bank could wait until later in the year to pull the trigger on cutting.

However, the discrepancy between those scenarios should not keep equities from climbing going forward. The Economic Expansion Is Still Strong U.S. initial jobless claims came in at 202,000 last week, while the one year seasonally adjusted moving average remains well below the peak level reached over the last year.

That peak of slightly over 250,000 occurred in June 2023. Also noteworthy is that jobless claims remain well below those seen during other periods of economic expansions and stock market gains. For example, on March 15, 1997, initial jobless claims came in at 319,000. On April 3, 2004, 335,000 initial jobless claims were reported.

Also impressively, “The advance seasonally adjusted insured unemployment rate was 1.2 percent for the week ending December 30,” the government reported. That means only 1.2% of the labor force obtained unemployment payments, indicating nearly 99% of those who want a job have one. Meanwhile, the Fed predicts the nation’s gross domestic product (GDP) expanded at a robust 2.2% seasonally adjusted clip, above inflation, last quarter.

Taken together, the data suggests that the U.S. economic expansion remains quite strong. S&P Earnings Likely Rose in Q4 Given the strong economic data, it’s not at all surprising the earnings of S&P 500 companies are expected to have risen last quarter versus the same period a year earlier.

Since their profits also climbed year over year in Q3, the last quarter would mark the second consecutive quarter of growth. The Outlook for Fed Rate Cuts Is Uncertain The Consumer Price Index climbed 0.3% in December versus November, marking an acceleration from the 0.1% gain reported for November.

On the other hand, excluding food and energy, the CPI advanced 0.3% in December, the same amount by which it rose in November. Although that’s not a high inflation rate historically, for both political and economic reasons, the Fed may be uncomfortable lowering rates with inflation still running at an annualized clip of 3.4%.

Politically, President Joe Biden, who I believe is the Fed’s preferred candidate for president, would likely be meaningfully hurt if inflation accelerates to the 4% to 5% range. Economically, many American businesses and the stock market would likely be negatively impacted if inflation meaningfully accelerates and the Fed has to respond by raising rates.

Also noteworthy is that the recent shipping issues in the Red Sea are putting upward pressure on oil prices and inflation, a situation that could make the Fed more cautious. However, producer prices dropped 0.1% in December versus November, indicating there could be downward pressure on the CPI in the coming months.

Moreover, Chicago Federal Reserve President Austan Goolsbee said he still expects the central bank to cut rates next year after the CPI data was released. Multi billionaire Bill Ackman, who has had a great record predicting the direction of rates over the last year, said after the CPI and PP data were released the Fed was “going to have to move early” on rate cuts.

Rates Are Not the Be All End All for Stocks Bolstered by myths like “Don’t fight the Fed” and the fact that stocks rallied when rates were extremely low from 2009 to 2021, many investors have started to believe that equities can’t rally unless rates are very low or dropping. But stocks proved that point of view to be flawed in 2023 as the S&P 500 soared 24% even as rates were relatively high and the Fed failed to cut them.

What’s more, as CNBC’s Josh Brown pointed out, historically stocks have managed to rise when the central bank isn’t cutting rates. He said, “I’m over 18 years old…I know there are market environments where stocks go up and rates don’t go down. In the 1990s they were [increasing] rates during a bull market and guess what..it was ok.” “If earnings growth continues, that’s better than rate cuts,” Brown added.

Like Brown, I believe that earnings growth and the continuation of the economic expansion will enable stocks to climb, whether the Fed starts cutting by June or not. On the date of publication, Larry Ramer did not hold (either directly or indirectly) any positions in the securities mentioned in this article.

The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines..