Earnings Push Stocks Higher

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The stock market has been roaring higher this year, and continues to reach all-time highs. In fact, in only six months the S&P 500 has already met its historical average return for the year. Up until the last few weeks, the market had been resilient and unfazed as it ignored political uncertainty, the Russian election probe, and various terrorist attacks overseas.  After gaining nearly 20% YTD, the NASDAQ has begun to see some increased volatility as traders take profits and reallocate to other sectors.  Some of the largest gains this year have come from the so-called FANG stocks, Facebook, Amazon, Netflix, and Google.

Forward P/E Ratio

The Trump trade has fizzled, which hasn’t helped the market lately, as many of his policies look increasingly likely to be pushed into next year.  However, strong corporate earnings growth in the U.S. has been a leading contributor to stock market performance this year.  Earnings growth for the 1st quarter of 2017 had a growth rate of ~15% year-over-year, which was the highest since the 3rd quarter of 2011.  Technology, Energy, and Financials were the leading sectors of growth this quarter.  Given these strong earnings, the S&P 500 continues to have a forward P/E (price to earnings) ratio of ~ 17.5x next year’s earnings, which is slightly above the 20-year average of 17.2x earnings but nowhere near the historical levels in early 2000.  Going forward earnings are expected to increase 10% over the next year and could see additional momentum if any of the Trump administration policies are enacted.   

Since the market bottom of early 2009, U.S. equities have outperformed their international counterparts in both developed and emerging markets by over 100%.  Emerging markets have been held back by falling commodity prices and depreciating currencies, while Europe experienced slow growth as a result of the European debt crisis. 

The tide has changed this year as the global economy continues to recover. Both International and emerging market equities have outperformed the S&P 500 this year.  Developed international economies have seen higher GDP growth, increased corporate earnings, and less political uncertainty.  This has led to the MSCI EAFE YTD return of 14.40% through May 31st, which includes countries such as Germany, France, and Japan. 

YTD Stock Market Returns

Emerging markets have been another bright spot for investors in 2017.  After several negative to flat years of under-performance, emerging markets have returned 17.34% through May 31st and the 1-year return is up 27%, as of this writing.  Investors have been willing to take on more risk as commodity prices have recovered and currencies have had greater stability.   

Going forward we wouldn’t be surprised to see some volatility given the market rally this year.  Stock market corrections (10% decline or greater) normally happen every 1 -2 years.  The last market correction happened in early 2016 when the market declined ~13.3% due to slowing growth concerns in China and depressed oil prices.  Given current economic data we do not expect a recession in the next 12 months, but wouldn’t be surprised to see higher volatility in the stock market this summer.  We continue to monitor the markets and will make strategic changes as they are warranted.

Dan H. Zeigler, CMFC®, CFP® is an Assistant Vice President, Wealth Advisor & Investment Officer with Alpine Trust & Investment Group

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