Has the Red Light Been Turned on to the Stock Exchange?

Much of what lies ahead of us as stock investors are green lights to rush forward.

But…and this is a big BUT, there is a blinking red light that we need to appreciate so that we can make more successful investments in the coming months.

We will talk in detail about this red light in the future, which led to an investment plan that will help us easily top the market.

Market Outlook

Let’s start by reviewing the bright green lights for investors right now:

• We are just a few weeks away from 24 months until the new bull market starts in October 2022. History shows that the average bull market lasts 63 months; Therefore, there is good reason to believe that there is enough time left.

• “Don’t Fight the FedThis is the proverbial battle cry of investors as the Fed lowers interest rates because it is a catalyst for future economic growth that leads to higher corporate earnings and, most importantly, higher stock prices. This party officially started on September 18th.^This The Fed meeting took place as it announced its first interest rate cut of 50 basis points, with the expectation of a further 150 basis point cut by the end of 2025. It’s hard not to be optimistic that the Fed is finally on our side.

• Typically, the Fed cuts interest rates in the middle of a recession to support a weakening economy. Surprisingly, GDP is growing at a healthy pace, with the Atlanta Fed’s GDPNow model pointing to above-trend growth of +2.9% in the third quarter. Or, to put it another way, aside from the occasional pullback or correction that occurs quite frequently during a long-term bull market cycle, there is no recession in sight and little reason to fear meaningful stock declines.

With all the green lights above, there’s no doubt you’ll find it difficult to worry about your stock investments. That’s why I need to share the most important red light right now. This is the current valuation of shares based on market capitalization in the chart below:

Valuation of megacaps (pink line) is MORBIDLY OBESE compared to historical norms. No… these aren’t exactly 1999 internet bubble valuations… but this is a valuation level that should not be sustained and expect these stocks (like the Magnificent 7) to underperform going forward to shrink their valuations.

The large caps as a whole (red line) are what I would call completely valuable at this stage. The key ingredient to moving significantly higher will be a revival of earnings growth after 2 lackluster years. Happily, Wall Street analysts think this will happen in late 2025, once the benefits of lower interest rates become apparent. So, at best, this group of larger-cap stocks will see modest returns next year. But breakeven wouldn’t surprise me either.

This leads us to focus on small caps (green line) and mid-caps (blue line) as where we will find value and future outperformance. Looking back 100 years, these stocks are far ahead of their larger peers in terms of annual earnings. However, this has not been the case for most of the last 4 years.

You could see the tide turning as interest rate cuts became final in September, with investors making a big rotation into smaller stocks that were outperforming this month. This Risk On shift makes sense and should continue given the much better value proposition.

Now I’ll go on record saying I’m not considering the S&P 500 (SPY) will be well over 6,000 by 2025. In fact, we could reach that level before we close out 2024 with a touch of the typical post-election rally followed by a Santa Claus rally.

This means 2025 will likely be a flat year for large caps. Therefore, those seeking outperformance should focus on small- and mid-cap stocks with the right mix of earnings growth and attractive valuation.

We’re pleased to make it even easier for you by focusing on the top picks from our POWR Ratings model, where we examine 13 Growth metrics as well as 31 Value metrics.

Going back to 1999, the POWR Ratings model narrowed in on these best-in-class stocks, producing an average annual return of +28.56% since 1999.

Some of my personal favorites are shared in the next section. Read on for more…

What to Do Next?

Explore my current portfolio of 11 stocks packed to the brim with outperformance benefits found in our proprietary POWR Ratings model. (Almost 4x better than the S&P 500 dating back to 1999).

These carefully selected picks are all based on my 44 years of investing experience that has seen bull markets, bear markets, and everything in between.

And right now this portfolio is outpacing the market.

If you would like to learn more and see my current 11 stock recommendations, please click the link below to get started now.

Steve Reitmeister’s Trading Plan and 11 Best Stocks >

I wish you a world of investment success!

Steve Reitmeister…but everyone calls me Reity (pronounced “Right”)
CEO, StockNews.com and Editor, Reitmeister Total Return

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SPY shares rose $0.38 (+0.07%) in premarket trading Friday. Since the beginning of the year, SPY has gained 21.54% in value, compared to a % increase in the benchmark S&P 500 index in the same period.

About the Author: Steve Reitmeister

Steve is better known to StockNews viewers as “Reity.” He is not only the CEO of the company, but also shares his 40 years of investment experience with the company. Reitmeister Total Return portfolio. Learn more about Reity’s history, along with links to his latest articles and stock picks. More…

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