NEW YORK - The U.S. stock market is the most expensive it has been in around two years. Its valuation could be put to the test as companies report earnings in coming weeks.
Signs of stubborn inflation have diminished expectations in recent weeks for how deeply the Federal Reserve will cut rates this year. Stocks rose after another stronger-than-expected employment report on Friday. Analysts expect to see earnings growth of 5% in the first quarter, according to LSEG data. That would be the lowest since the second quarter of 2023. They expect margins to be squeezed by high interest rates, rising commodity costs, and falling corporate pricing power due to slowing inflation. Earnings grew by 10.1% in the fourth quarter of 2023.
At the same time, investors will be watching whether evidence of continuing strength in the U.S. economy flows through to rising revenues and earnings for industrial, energy, and other sectors that are closely tied to growth. Shares of these companies have largely performed well this year in a rally that has spread beyond technology and growth names.
March U.S. employment numbers backed up that narrative. Nonfarm payrolls increased by 303,000 jobs last month, far above expectations. Futures markets show investors expect the Fed to deliver around 70 basis points of rate cuts this year, compared to 150 basis points they had factored in January.
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