SPLG: More Room for Bull Run to Continue (NYSEARCA:SPLG)

Despite healthy gains and a bull run of over 20 months, I think the uptrend is likely to last longer. There are a number of reasons why I think the bull run will last longer, including two consecutive years of double-digit earnings growth for the S&P 500, strong tech performance, and modest economic growth. In the meantime, barring extreme events, the risk factor appears limited. upgrade My Buy rating on SPDR® Portfolio S&P 500® ETF (NYSEARCA:SPLG) to a purchase from a hold position.

Prospects for sustained rise are high

The S&P 500 index has gained nearly 45% during the current bull run, driven by gains from the technology sector and positive contributions from other sectors. The index is currently trading around a record high of 5,500 points, with market experts having mixed views on the outlook. Some are waiting The S&P 500 is expected to end the year around 6,000 points while others anticipate a correction. For example, Piper Sandler’s chief market technician anticipate A 10% correction this summer from current levels. In my view, the case for an extension of the bull run is strong and the downside risk is limited. This is due to strong fundamentals, including double-digit earnings growth and a stabilizing economy.

Earnings growth is the key catalyst

Earnings growth has historically been the primary driver of investor confidence in the overall stock index. After slow earnings growth in 2023, FactSet data shows that S&P 500 earnings are expected to grow at a double-digit rate for two consecutive years. In 2024 and 2025, earnings are expected to grow by about 11% and 14%, respectively. The index last saw two consecutive years of double-digit earnings growth in 2017 and 2018. Historical stock price trends show that stock prices rise significantly when earnings are growing at a strong pace. For example, the S&P 500 rose nearly 19% in fiscal 2017, when earnings grew about 11%, while the index climbed 43% between 2017 and 2019. Similarly, the S&P 500 saw a strong rally in 2021 due to earnings growth of about 47%.

In addition to boosting investor confidence in stocks, earnings growth always has multiple effects on companies and shareholder returns. For example, higher earnings growth improves the cash flow generation potential of companies, allowing them to fund new growth opportunities while returning healthy cash to shareholders. For example, Meta Platforms, Inc. (META), which reported nearly 200% earnings growth in 2023 and a 117% increase in the first quarter, repurchased a massive $14.6 billion of its Class A common stock in the most recent quarter. The earnings performance in recent quarters has allowed it to accumulate billions of dollars in cash reserves. In the most recent quarter, the company produced $12.5 billion in free cash flow and had $58 billion in cash and market securities.

Microsoft Corporation (MSFT), Alphabet Inc. (GOOG) (GOOGL), Apple Inc. (AAPL), Amazon.com, Inc. (AMZN), and NVIDIA Corporation (NVDA) also generated substantial free cash flow. For example, NVIDIA ended the March quarter with $31 billion in cash, cash equivalents, and marketable securities, compared to $25 billion in the prior quarter. The strong cash growth is supported by its earnings growth capability and a significant increase in free cash flow. NVIDIA’s non-GAAP earnings per share for the March quarter increased 19% sequentially and 461% year-over-year. As a result, the company produced a whopping $14.9 billion in free cash flow, compared to $11.2 billion in the prior quarter and $2.6 billion in the prior-year period. At the same time, the company’s long-term and short-term debt amounted to approximately $8.5 billion and $1.2 billion, respectively.

Additionally, another important factor is that S&P 500 earnings growth in 2024 and 2025 is expected to be driven by high-growth sectors, such as communications, information technology, and consumer cyclicals. Strong performance from these sectors is crucial for the bull run, as they collectively represent nearly half of the weight of the S&P 500 and have performed exceptionally well so far in the current bull run. Data shows that mega-caps are once again expected to lead the S&P 500 earnings growth trend in 2024 and 2025. For example, NVIDIA is expected to generate 100% earnings growth in 2024, while other mega-cap technology companies, including Alphabet, Meta, Amazon, and Microsoft, are expected to produce double-digit earnings growth. Earnings growth in other key sectors, such as financials, healthcare, utilities and industrials, is also expected to remain strong.

Fed’s Soft Landing and Economic Stabilization

Although the Fed has delayed its rate cuts and now only anticipates one in 2024, I believe the market has adjusted to high rates. This is clearly reflected in the strong performance of the financial sector. For example, after posting record profits in 2023, banks and financial services companies have seen significant profit growth and lower provisions for credit losses in the first quarter of 2024. Apparently, there is no risk of a financial crisis. The bank’s strategy of increasing interest on deposits has helped them improve deposits in recent months.

Nevertheless, the market is now closer to a first rate cut in the second half of 2024 and several cuts in 2025, which I believe will strengthen investor confidence and economic activity. Moreover, the prospects for a soft landing are also high, as the Fed appears so far to have succeeded in reducing inflation without pushing the economy into recession. Overall, economic conditions should remain solid, with a potential GDP growth rate of 2.2% for the second quarter and around 2% for the full year.

Why is SPLG the right investment vehicle?

There are a number of investment options to track the U.S. large-cap stock market. SPDR® S&P 500® ETF Trust (SPY) and Vanguard S&P 500 ETF (VOO) are among the most popular options given their massive assets under management of $1.4 trillion and $550 billion, respectively. However, I think SPLG could also be a solid ETF to track the rising S&P 500. While their portfolio structure, share price performance, and dividend yield are the same, SPLG looks attractive due to its low expense ratio and cheap share price relative to its peers. SPLG’s expense ratio is 0.02%, compared to 0.09% for SPY and 0.03% for VOO.

Additionally, SPLG appears to be a low-cost way to track the S&P 500. Its stock price is currently around $64, compared to $540 for SPY and $500 for VOO. The low stock price is very important because it allows investors to purchase a large number of shares. For example, with $100,000 in capital, investors can purchase 1,562 shares of SPLG. At the same time, with the same amount of capital, investors can only purchase 200 shares of VOO and 184 shares of SPY. Even though with the same total amount of funds, investors get an identical stake in the S&P 500 on a percentage basis, the number of shares is important for a variety of reasons, including dividends and trading flexibility. Since companies and funds offer dividends per share, the number of shares determines the amount of the total dividend yield. A large number of shares also increases trading flexibility. For example, with a large number of stocks, investors may be better positioned to sell a certain percentage of stocks to capitalize on the recent rally or reduce the potential downside impact while maintaining their exposure to the index.

Risk factors to consider

In my opinion, the most important risk factor is the high valuation. The S&P 500 is currently trading above its 10-year average, based on historical and forward earnings. On the positive side, the ratio has cooled due to solid earnings growth prospects. Currently, the S&P 500 is trading at about 22.66 times forward earnings, down from 23.41 times last quarter and 26.26 times a year ago. With 2025 earnings expected to rise nearly 14% from the previous year, it seems that earnings will continue to support the uptrend. In addition, the Fed’s policy of keeping rates at record lows for a longer period of time could also have a negative impact on the stock markets.

In conclusion

Despite one of the fastest rate hike policies, the US stock market has performed exceptionally well over the past year and so far, driven by strong performance from technology stocks. The trend is expected to continue in the second half of the year and over the long term, driven by strong demand for technology and AI-related products. In addition, improving financial forecasts for non-tech stocks will also improve the magnitude of the upside. Overall, initiating, maintaining or increasing exposure to the S&P 500 Index through ETFs like SPLG could be a prudent strategy. Its cheap share price, high liquidity and low expense ratio make it a solid investment vehicle to track the S&P 500.