“Our work suggests the equity markets are gathering enough energy, and momentum, to permit a dash to new all-time highs and then keep right on pushing higher. Interestingly, almost NOBODY is expecting this to occur. Most continue to look for a decline, or at best a range-bound stock market. We do not believe it.”
— Jeffrey Saut, Chief Investment Strategist of Raymond James
Range-bound would be a good descriptor for investments so far in 2018. Bond markets continue to be anemic, down on average a couple of percentage points this year. Stocks are little better, with the Dow and most international indices in negative territory, while the S&P 500 is slightly positive. ‘Much ado about nothing’ might be another fair descriptor of 2018’s markets.
So why the positive sentiment coming from Mr. Saut and his team of analysts? In a nutshell, earnings. Stocks may not be racing higher, but really good things are happening below the surface. More specifically, earnings are surging. Rising earnings create a ‘potential energy’ of sorts for stocks not reflected in current stock prices. As owners of stock, our companies are worth more when they earn more. Investors know,“You can pay us now or you can pay us later. But we will eventually be paid.”
So just how strong is this story? As depicted in the earnings chart below, we find ourselves in the midst of one of the strongest earnings increases in recent market history.
Recent quarters have witnessed greater than twenty percent year-over-year gains in earnings. And both companies and analysts are telling us more is yet to come. Low unemployment, strong consumer confidence, surging capital investment by U.S. corporations, and tax reform all underpin this trend.
That’s not to say we are without challenges. Tariffs, rising interest rates, and a looming slowdown in earnings growth all weigh on the markets. Of these, we find the concern over future earnings to be of most interest. Currently, analysts are predicting that earnings growth will drop to roughly ten percent year-over-year for calendar 2019. Now that’s a problem we can live with. 2018 earnings growth will likely top twenty percent this year. And 2019 may grow ten percent from there. Yes, ten percent is less than twenty, but we’d happily settle for ten percent earnings growth in perpetuity.
Needless to say, a lot could happen between now and the materialization of the earnings that are currently being predicted. Some worry that the yield curve may be signaling a recession next year. That’s always a possibility. But we simply do not have enough data to predict that outcome with any degree of confidence, and we have a preponderance of data pointing the other direction for the time being. Also encouraging, even if a recession were to materialize, history teaches us that it would likely be shallow and short-lived under current conditions.
Wade Daniel is the Chief Executive Officer at Wealthquest – a Cincinnati based financial planning and wealth management firm that offers a full range of financial services under one roof, for one simple fee.
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