After Federal Reserve Chief Janet Yellen said Friday in Wyoming that the case for hiking interest rates has gotten stronger, investor focus is back on whether the stock market has peaked. Of course, the bears are convinced more than ever that the bull market has run its course.
The recent downside pressure on the pharmaceuticals and biotechs, questions about the strength of corporate earnings and concerns about an aging (90 months old) bull run for stocks are among the issues fueling the pessimists’ claim that the market is destined to start a downward spiral from here.
Not so fast. Several experienced market watchers argue otherwise based on both fundamental and technical reasons. They’re confident that the bull is alive and well.
“Summary results for the second quarter, recently reported by by S&P DJ Indices, offered reasons for continued investor optimism,” said Sam Stovall, managing director and U.S. equity strategist at S&P Global Market Intelligence. He noted that with more than 95 percent of the results in, this year’s second quarter “should set a new cash and equivalents record for the S&P 500 (minus the financials and utilities sectors).”
Stovall also pointed out that capital spending for the entire S&P 500 is coming in 7.4 percent higher than in 2016’s first-quarter, although 3 percent lower than that of 2015’s second quarter.
What’s more, Stovall expects S&P 500 dividends for this quarter “should set a new record and could be the first quarterly $100 billion S&P dividend payout.” He projects full-year 2016 dividend growth will be in the low- to mid-single digits, down from double-digit gains in each of the prior five years.
From a technical perspective, the S&P 500’s price action isn’t making much upside headway, but the index “remains well positioned to move higher while above the nearby support zone at 2159-2175,” according to the technical analysts of the S&P’s U.S. Investment Policy Committee. But even if the index pulls back even more, to the level of 2134 and 2115, “we would expect to see significant buying interest from those waiting for a decent pullback to enter on the long side,” the analysts said.
They also noted that the VIX, or volatility index, “remains at the lowest levels seen in a year as the SPX hovers in new all-time high territory,” they added that “the bias is bullish, and the VIX doesn’t indicate increased downside risk at this time.” The analysts also argue that “we may very well be entering into the next ‘buy the dip’ phase where short-lived spikes in VIX are markers of good buying opportunities.”
Addressing another concern that the bears have been harping on, “The earnings recession is over,” declared Ed Yardeni, president and chief investment of Yardeni Research, in his Aug. 22, 2016, “Morning Briefing” report. The five quarters of lower corporate earnings, he said, ended during the fourth quarter of 2015, and profits are rebounding this year along with oil prices.
Yardeni noted that reported corporate earnings rose 24.7 percent during the first two quarters of this year as the price of a barrel of Brent crude oil climbed 33 percent during that period. This suggests, he said, “that the energy-led earnings recession is over.”
On Aug. 8, 2016, this column pointed out five reasons why investors should remain bullish on stocks, according to Michael Wilson, chief investment officer at Morgan Stanley Wealth Management. Here’s his positive take on what’s happening: The economy is strengthening, corporate profits are improving, valuations are attractive, market sentiment is favorable and the stock market itself has strong underlying health.
And if analysts looking at the fundamentals are right that earnings drive the market, then it’s in great shape because the outlook for 2017 earnings are highly positive, according to strategists at S&P Global Market Intelligence. Indeed, the fundamental metrics that the market most cares about are the totality of corporate earnings and revenues. If the S&P analysts are on the money in their assessment of the 2017 earnings outlook, the market should be in a highly positive condition.
Yardeni noted that it’s an appropriate time to look at the dramatic improvements to corporate earnings and revenue growth that analysts are expecting in 2017. S&P 500 companies are expected next year to produce a 13.5 percent jump in earnings growth on 6.2 percent revenue growth.
That’s quite an improvement over the meager 0.4 percent earnings growth logged in 2015 and the 0.9 percent expected this year, said Yardeni. And it would be in stark contrast to the string of four consecutive quarters of falling earnings for the S&P 500, he added.
So where would this greatly improved earnings rally come from? Leading the big leap in profits is the materials sector, whose earnings are expected to be in the red by 0.3 percent this year but jump by 17 percent next year. Then there’s technology, which is expected to be up 1 percent this year but then climb 11.9 percent in 2017. And finally financials, which are expected to be up 1.4 percent this year before leaping 11.9 percent higher next year.