As of November 2024, the US stock market is experiencing a complex landscape characterized by solid third-quarter earnings but mixed guidance for the future. The US economy is running faster than anticipated, with projected GDP growth of 1.5% for the fourth quarter of 2024. Despite this positive economic outlook, the market has dropped approximately 2% since the earnings season began, reflecting investor caution amid high valuations. The price-to-fair value metric of the US stock market stands at 1.02 as of October 31, 2024, indicating that stocks are expensive but for reasons tied to economic performance and growth expectations. Small-cap stocks are trading at a 14% discount to fair value, while the energy sector is at a 9% discount. Notably, the communications sector is identified as the most undervalued, trading at a 14% discount, whereas the utilities sector is considered the most overvalued, with a 13% premium [8675af77].
In terms of inflation, expectations are that it will fall below 2% in 2025, which could influence Federal Reserve policy. The central bank is anticipated to cut interest rates to a range of 3.00%-3.25% by the end of 2025, which may further impact market dynamics [8675af77]. Investors are advised to consider positioning themselves strategically in undervalued sectors such as communications and energy, as these areas present potential opportunities amid the overall expensive market valuations.
Meanwhile, US technology stocks continue to outperform, with earnings per share (EPS) rising around 2% from a year earlier. The IT sector is expected to see revenue growth of about 10% and EPS growth of approximately 22% in 2024, which is double the anticipated growth for the wider market. This growth is driven by demand for generative AI semiconductors and innovations in digitalization and cloud computing. Companies are focusing on profitability through cost measures, including slower hiring and project cutbacks, which could support further share price gains if revenues align with market expectations [6b1f8aec].
Lombard Odier has increased their allocations to US stocks, particularly in communication services, while maintaining a strategic level of exposure to the tech sector. Their tactical exposure to the US market is now overweight compared to their strategic benchmark, reflecting confidence in the US economy's resilience and growth potential. They also expect the dollar to appreciate in the first half of 2024, driven by US growth upgrades and a favorable yield advantage, despite potential political risks and global economic recovery challenges later in the year [6b1f8aec].