Hopes US bull market will keep going
NEW YORK: Nervous stock investors are hoping an unusually US strong earnings season can restore some of the optimism seen on equity markets last year.
Imploding technology stocks and fears of a trade war have pummelled the market in recent days. Given the surge in volatility this year, there is no guarantee the worst is over.
Analysts predict strong results when reporting season starts up this month, with firstquarter S&P 500 profit growth on track to be the highest in seven years, according to Thomson Reuters data. That follows a blockbuster fourthquarter period and recent corporate tax cuts that boosted forecasts for all of 2018.
A robust earnings period would bring back the focus on fundamentals and possibly put a floor under prices, supporting views the 9yearold bull market would go on, strategists said.
‘‘It’s going to be earnings,’’ said Robert Pavlik, chief investment strategist and senior portfolio manager at SlateStone Wealth LLC in New York.
‘‘The market has given up so much that earnings can start to redirect attention back into a market that has gotten much cheaper relative to where we were.’’
With this year’s selloff and rising profit forecasts, stocks also are looking cheaper on a pricetoearnings basis than they have since late 2016. The S&P 500 is trading at about 16.5 times forward earnings, well below the 18.9 level it was at in midDecember, according to Thomson Reuters data.
The stock rout in early Feb ruary and more recent selling following worries over a US trade war with China, Facebook privacy issues and a collapse in other tech leaders have made investors skittish and more likely to discount the relatively strong economic backdrop that persists.
‘‘We’ve been caught up in all of these things that could happen and may happen and that the sky is falling, but once earnings season kicks in, it’s headline news and that steals away some of the negativity,’’ said Daniel Morgan, senior portfolio manager at Synovus Trust Company in Atlanta.
This week brings the monthly US jobs report, a potential catalyst for further volatility. A strong payrolls report in early February helped spark the stock selloff that dragged the S&P 500 down more than 10% below its January 26 record high — a ‘‘correction.’’
The job report briefly drove up bond yields and touched off worries the Federal Reserve may need to speed up interest rate hikes. The S&P 500 is now about 8% below its record.
Just in the first three months of this year, the S&P has jumped or fallen 1% on 23 trading days, three times the number of 1% moves it made in all of 2017. In 2016, there were 48 such days.
Market participants agree US stocks are unlikely to return to the unusually calm conditions seen last year, when the Cboe Volatility Index, the most widelyfollowed barometer of expected nearterm ups and downs for the S&P 500, logged a record low daily average reading of 11. The VIX hit a two and ahalf year high above 50 in early February.
Expectations for US earnings this year have jumped since December, when US lawmakers approved sweeping changes to the tax law, including slashing the corporate tax rate to 21% from 35%. Growth in other major economies has also lifted profit forecasts for the large stocks that generate a lot of sales overseas.
Analysts now expect firstquarter earnings for S&P 500 companies to rise 18.5% from a year ago, according to Thomson Reuters data.