The S&P 500 Index and the Nasdaq Composite closed at all time highs on April 23rd, marking a significant turnaround from the U.S. stock market’s decline at the end of 2018. The S&P 500 Index closed the day at 2,933.68 and the Nasdaq at 8,120.82. For the year, the S&P 500 Index is now up over 17%. A combination of encouraging macroeconomic and microeconomic data have led the stock market higher this year. In light of the market recovery, it makes sense to review what are the contributing factors.
From a macro perspective, several key influencers have driven global equity markets higher. First, Fed Chairman Jerome Powell and the Fed have clarified their views on interest rate policy, indicating that they plan to pause on hiking short-term interest rates. Economists and market watchers had become concerned that the Fed was going to raise short-term rates too aggressively this year, leading to an “inverted yield curve” where short-term interest rates become higher than long-term interest rates. In these situations when a yield curve inverts, it often is a predictor of a coming economic recession. With the Fed now on hold, the fear of rapidly rising short-term interest rates has been quieted.
Another positive tailwind for the U.S. has been improving trade discussions with China. Due to ongoing negotiations with China, including threats of tariffs, the markets have been understandably nervous about a potential bad outcome. A trade war with China would be tremendously bad for both countries, negatively effecting the profits of many U.S. companies and potentially harming U.S. GDP growth. In recent weeks, the tone of negotiations between the U.S. and China has improved. A positive outcome to a trade deal with China would be a welcome development by the U.S. stock market.
Ultimately the market runs on earnings and the profitability of public companies. At the individual company level, earnings for U.S. companies have improved from a fairly pessimistic outlook at the beginning of the year. While earnings growth in the first quarter of 2019 will likely be negative year-over-year, the estimates for full-year U.S. corporate earnings have actually improved in recent weeks. According to FactSet Data, more than 75% of S&P 500 companies that have reported earnings so far have exceeded estimates. For the year, analysts expect S&P 500 earnings growth of 3.4% and revenue growth of 4.7%.
Valuations remain reasonable, which has also given support to stock market levels. While the U.S. equity market today is no longer cheap, at 16.8 times forward earnings it trades approximately in-line with the five-year average. A rising earnings outlook in 2019 could provide support for higher stock market levels for the rest of the year.
We remain vigilant in monitoring the financial markets and client portfolios. While we welcome new highs in the U.S. stock market, we are also cognizant of preparing for a future which may be less rosy. As part of this discussion with our clients, we are actively reviewing the Recession Prep Checklist—our latest proprietary tool. Please contact our team to have a more detailed review of your financial plan.
 FactSet. “Earnings Insight.” April 18, 2019. https://www.factset.com/hubfs/Resources%20Section/Research%20Desk/Earnings%20Insight/EarningsInsight_041819.pdf