One of my financial planning clients saw an ABC commentator saying and showing enough to ‘frighten’ him to ask whether he should remain exposed to the stock market. This client had just made close to 15% for the year for his super fund and I guess he had to ask the question.

His return was good considering the Australian stock market’s capital gain (as measured by the S&P/ASX 200) was up only 9.05% for the year. The market is by definition 100% exposed to stocks but my client is now only 70% exposed to stocks. At the start of the year, he was less exposed but because his portfolio has done so well, he now has more assets in stocks (or growth assets).

Over the past two years, the overall local market is up about 15%, which isn’t enough to spook me. Compared to the US stock market, our shares have lagged behind. In contrast, Wall Street’s S&P500 index is up 24.64% for the past year.  Over the past two years, it’s up over 45%!

Now the ABC report focussed on some expert who was predicting that negative times were heading for Wall Street and undoubtedly the big tech stocks called the Magnificent Seven (M7) i.e., Alphabet, Amazon, Apple, Meta Platforms, Microsoft, NVIDIA, and Tesla.

These have not only seen their own stock prices boom ever since there was talk of rate cuts in the US in 2023, they’ve also driven the S&P 500 index up as well because of their size and influence on that index.

Over the same time, the Nasdaq (that captures most of the hi-tech companies in its index) was up around, wait for it, 60%!

Take these seven stocks out and the overall US stock market hasn’t done as well. In February, forbes.com reported the following: “Dating back to the end of 2022, the median return of the 493 S&P components not included in the magnificent seven is 13%, far below the S&P’s 35% return owing to the magnificent seven’s average return of 154%”.

So, while the US market rise numbers look worryingly high, the other companies have only had moderate rises and, like many of our companies, are overdue for a rise. Therefore, the next question has to be: what will help the other 493 stocks gain over the next year or two, to render the ABC’s scary report less worrying?

Many of these other non-M7 companies were smacked (share price-wise) when the Yanks copped 11 interest rate rises and they’ve been waiting for a time when lower inflation in the US would drive rates down.

Part of the reason why US stocks generally have done well in recent weeks is the belief that the US Federal Reserve is very likely to cut rates in September. The central bank boss, Jerome Powell, has reacted to good inflation data and he left market messages such as:

1. The data will drive the rates decision.
2. The US election won’t delay a cut if the data says one is warranted.
3. Leaving rates too high for too long could be bad for the US economy, implying an expected soft landing without a recession could end up being a hard landing instead.

Powell isn’t a softie, and we’ll hear from him this week when he speaks at the Economic Club of Washington. Big market players will hang off every word. There’s also a swag of economic data out this week in the US, including retail sales, industrial production and the leading index of the US economy.

Right now, the money markets expect there’s a 93% chance of a rate cut in the US in September, which could be the start of another leg up for US stocks, as lower interest rates will be good for many of the 493 companies that have struggled since rates were pushed up.

At the same time, there could be selling of the M7 stocks to buy those companies in the 493 group, so there could be ‘ups and downs’ for the index, but I can’t see the M7 stocks being dumped so hard that the US market crashes. And it’s crashes that my client should worry about.

Right now, the M7 group and some other tech companies have a tailwind for their stock prices called Artificial Intelligence (AI). This is in its early stages. AI companies will benefit from lower interest rates as well and so will their customers.

Historically, stock markets rise when interest rates are cut, especially so if there’s little fear about a looming recession.

And I’m not alone in my optimism for stocks for the next year or so. Chief investment strategist at US investment bank Oppenheimer Holdings, John Stoltzfus, raised his year-end S&P 500 target to 5900 from 5500. That index is now 5615.35.“Stoltzfus noted that artificial intelligence has sparked a mindset shift in the market that’s driven ‘not so much by fear and greed but a need to invest for intermediate to longer term goals. This change could benefit the 11 S&P 500 sectors as this ‘innovation cycle’ shows signs of being both ‘cyclical and secular coupled with cross generational demographic needs’,” he told CNBC.

Meanwhile, history has shown when stock markets hit all-time highs (like now), they keep hitting those highs until scary things happen, such as rising rates, a recession or a ‘surprise’ from financial markets.

Right now, I expect some ‘ups and downs’ for stocks but on a rising trend, as lower interest rates help lots of companies and consumers in the US. Eventually, we’ll see lower inflation and falling interest rates and that will lift our stock market, but we’ll benefit from Wall Street lifting on those lower rates.

This time next year, with a new US President, I could say “enough is enough” for being long stocks. Then I could easily go defensive and chase income. But right now, I wouldn’t be afraid of reports of negatives ahead from an ABC commentator.

And here are more reasons to stick with stocks:

1. Shane Oliver’s take: “Shares are continuing to climb a wall of worry. Stretched valuations particularly for US shares, elevated investor sentiment, ongoing recession risks and high geopolitical uncertainty particularly around the US election warn of a correction and more volatility in share markets, possibly in the seasonally weak August/September period. But for now, the trend is up – July is usually a seasonally strong month, the US earnings reporting season is likely to again surprise on the upside, we may be starting to see a healthy rotation away from tech stocks to value and cyclical shares and more central banks are getting on track to cut rates which should boost growth expectations for 2025-26 and drive lower bond yields, supporting share returns on a 12-month view. Australian shares are likely to remain relative underperformers reflecting risks around China & a more hawkish RBA and are also vulnerable to correction risks, but they are still likely to benefit from the rising trend globally and anticipation the RBA will eventually follow other central banks into rate cuts. Our calendar year end forecast for the ASX 200 of 7900 has already been surpassed and so we are raising it to 8100.
2. finance.yahoo.com: “Jeremy Siegel says the stock market bull run isn’t over, points to attractive group with ‘a lot of way to go’.” This former Uni of Pennsylvania Professor of Finance is market-smart, and he points out that there are 10 other sectors, other than tech, and these have upside as interest rates fall in the US.
3. USbank.com recently told its customers: “The general outlook for the S&P 500 as a whole remains strong,” says Rob Haworth, senior investment strategy director for U.S. Bank Wealth Management. “Earnings forecasts for the rest of the year appear solid, so that should create a supportive environment for equities.”
4. Many experts are looking at expected rate cuts and nominating small cap stocks and emerging markets as the place to be going forward.
5. My chart chats with Fairmont Equities’ Mike Gable still point to upside for both the S&P 500 and our market.
6. According to Reuters: “Stocks have typically risen in the six- to 12-month period following the Fed’s first rate cut, as long as the economy avoids recession, Truist’s research showed. Lower interest rates could also help broaden the equity rally, which has been led by a handful of megacap companies like Nvidia (NVDA.O).”
7. Investopedia: “Generally, interest rates and the stock market have an inverse relationship. When interest rates rise, share prices fall. Bonds become more attractive. When interest rates rise, it can make borrowing money for a company more expensive, which means they have less money to invest back in the company and less cash flow stability, which typically puts pressure on share prices. When interest rates fall, the inverse is true for all of the above”.

The case of remaining long stocks as rates fall over the next year is a pretty strong one on interest rates cuts alone, but I think we’ll see more companies arguing that their profit outlook will be helped by the AI tailwind.

Important informati on: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.