Equity Market Sentiment Has Turned Bullish: Strong Recent Performance May be Due for a Pause

February, 2024

Equity Market Sentiment Has Turned Bullish: Strong Recent Performance May be Due for a Pause

Returns in the U.S. equity market have continued the upward march in 2024. Driving the positive returns has been positive economic growth, stable interest rates, positive earnings (at least from the mega caps), and improving investor sentiment. The last factor, investor sentiment, has been a historically good contra indicator for future returns. Bearish sentiment reached a one-year high over 50% and well above the historical average for the week ending 11/1/2023 and has since receded to under 25%. The S&P 500 has risen by nearly 20% over that period.

However, now that negative sentiment has fallen, other market indicators are now flashing yellow. Notably among these is valuation multiples. Over the past few months, valuation multiples have been expanding faster than forward earnings expectations, serving as a key driver for market appreciation. The forward price-to-earnings ratio (P/E) has moved back above 20X, a level well above longer-term averages. However, dispersion exists for P/E multiples when breaking out sectors of the economy. Technology is currently trading well above history, while most other sectors are trading in line with history or, in the case of utilities, well below history.

While relatively bullish investor sentiment and elevated valuation metrics suggest near term caution, ultimately earnings growth will drive the market over the longer term. The potential for technology to deliver strong long-term growth above that of other sectors may well justify the premium at which it trades. However, elevated multiples also reflect high expectations for the future and a higher bar for the sector and companies to clear.

At Pallas Capital Advisors, we seek to balance growth expectations and valuation with our equity selection and allocation. The current market dynamic suggests diversification and a longer-term outlook for equities to allow earnings to drive returns. Near-term bullish sentiment and valuation suggests a pause in markets may be in order.

Important Disclosure:

The information contained herein is for informational purposes only, is not personalized investment advice and should not be construed as a recommendation to purchase or sell any particular security, sector or strategy to any individual person or entity. The decision to review or consider the purchase or sale of any security, sector or strategy mentioned should not be undertaken without consideration of your personal financial information, investment objectives and risk tolerance with your financial professional. Past performance should not be considered as an indicator of future results. Investment Advice offered through Pallas Capital Advisors LLC, a registered investment advisor.

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Mark-Bogar

Mark A. Bogar, CFA®, CAIA®
Chief Investment Officer
Pallas Capital Advisors

Stephen Kylander

Stephen Kylander
Senior Portfolio Manager
Pallas Capital Advisors

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The information contained herein is for informational purposes only, is not personalized investment advice and should not be construed as a recommendation to purchase or sell any particular security, sector or strategy to any individual person or entity. The decision to review or consider the purchase or sale of any security, sector or strategy mentioned should not be undertaken without consideration of your personal financial information, investment objectives and risk tolerance with your financial professional. Past performance should not be considered as an indicator of future results.

Investment Advice offered through Pallas Capital Advisors LLC, a registered investment advisor.

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The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation. Opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.

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Advisory services are only offered to clients or prospective clients where Pallas Capital Advisors and its representatives are properly licensed or exempt from licensure. This website is solely for informational purposes. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Pallas Capital Advisors unless a client service agreement is in place.

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.

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