Don’t look now fans, but the is trading almost exactly at all-time highs on this fine summer Monday morning. Never mind the overbought conditions, the exuberant sentiment, and the extremely high valuations that technicians have been warning about. Forget about the economy slowing. The jobs data. The trade wars. The geopolitical messes. Or that inflation is going the wrong direction at the moment. Nope, instead of pulling back and fretting about all the bad things the bears have been forecasting, stocks have continued to inch their way higher lately. Nice.
To be sure, the action is a little surprising. As someone who has managed money for a living for nearly 40 years, I recognize that things have been getting more than a little frothy lately. And I would not be at all surprised if the bulls decided to take a breather for a while. After all, trees don’t grow to the sky and Ms. Market’s game is usually a “two steps forward and one step back” type of affair.
Sticking With The Script
As I’ve mentioned a time or two, the stock market has been “in sync” with its historical cycles since the middle of April. Prior to that, traders were busy throwing their tariff tantrums, sending the S&P into bear market territory – for a moment, anyway. But since then, stocks have acted almost exactly as the historical cycle composite I follow has projected.
To review, the cycle composite is the brainchild of Ned Davis Research and combines all the 1-, 4-, and 10-year cycles since 1900. The computer mashes the cycles up and creates a projection for the year – ahead of time.
Copyright Ned Davis Research Group, All Rights Reserved
As you can see, the cycle composite has been a great guide since the tariff tantrums ended. Impressive, eh?
So, with the cycle composite calling for the market to move sideways from now until the traditionally strong year-end period begins in November, who are we to argue? As such, it won’t surprise me to see some sloppiness set in at some point soon. But for now, the bulls seem to be on a roll.
The Question Is, Why?
The question even some of the most ardent bulls are asking these days is why are stocks still moving higher? After the fastest rebound from a bear in history, why hasn’t there been any kind of pullback?
The answer, in my humble opinion, is simple. Earnings. And earnings expectations going forward.
Recall that analysts spent the first few months of the year knocking down their estimates of what tariffs were going to do to the consumer, the economy, inflation, and in turn, earnings. In short, earnings estimates were cut in half – starting in Q2.
All About Earnings, Still
But… With the Q2 Earnings Parade now almost completely in the rear-view mirror, it turns out the analysts didn’t exactly get it right. No, it turns out that those analysts’ estimates were cut entirely too far as all that tariff-related negativity that everyone was so dang sure of didn’t work out as projected.
According to FactSet’s Earnings Insight, just over 90% of the S&P 500 companies have now reported their Q2 numbers. The blended growth rate for the quarter currently stands at wait for it… 11.8%. This compares quite favorably to the consensus guesstimates of 4.9% at the beginning of the quarter. Wow… Missed it by “that much!”
So, let’s review. At the beginning of the year, the consensus earnings estimate for the second quarter was 13.9%. (Recall that the strong earnings projected to occur was one of the main drivers for stocks movin’ on up last year.) Then the tariff wars began, and analysts assumed the worst, cutting their growth rate estimate to below 5% in the process.
But a funny thing happened on the way to the debacle… It just didn’t happen. Instead, 81% of companies beat expectations with earnings that were 8.4% ABOVE expectations. Not too shabby.
Sure, the bears will argue that the full effects of tariffs are yet to be felt. Which is certainly true. But we are also seeing some interesting stuff happening along the way that the analysts had NOT expected. Things like reports of Japanese auto parts manufacturers lowering the cost of parts by more than the tariffs. Things like U.S. car companies eating the tariffs. And so on…
The point is that (a) we don’t know exactly is going to happen with the tariffs, which have proven to be a moving target, (b) tariffs are a one-time thing, and (c) the tariffs are projected to produce meaningful revenue to the U.S.
In addition, it looks like the Fed is about to take their foot off the economy’s throat and start to cut rates. And lest we forget, the stock market usually does pretty well when the Fed is lowering rates.
So… My takeaway is instead of “assuming” you know what will happen next, it might be a better idea to wait to see what “actually” happens before making any big moves.
And while I certainly do expect to see the bulls take a pause here at some point soon, I for one plan on remaining seated on the bull train – especially with earnings expected to continue to advance.
Thought for the Day
Create a life that feels good on the inside, not one that just looks good on the outside…
Wishing you green screens and all the best for a great day.