America’s bull market gets vertigo

A BMW car
A hill to climb: European cars face US tariffs

US stocks are heading for a post-war record. The benchmark S&P 500 index, which sets the tone for the rest of the world, has been in a bull market since March 2009 – or just over 3,400 days, as stockbroker AJ Bell points out. It is only 50 days short of the longest post-1945 bull run, October 1990 to March 2000. And having risen by 400%, it has easily eclipsed the 283% average rise of the ten previous post-war bull runs. It may well get through the next three months without slipping by 20% – which would constitute a bear market – and thus break the record. But then? “The list of headwinds is long and daunting,” says Fidelity’s Tom Stevenson in The Daily Telegraph.

A sea of troubles

Global stocks have suffered their worst first half since 2010, with the MSCI World Index of developed-country equities slipping by 1.3%; Europe and Japan finished down, while the S&P 500 ticked up. The global economy has lost some momentum, with European and Japanese data proving disappointing of late. This is partly due to the deteriorating outlook for global trade – their economies and stockmarkets are more dependent on exports than America’s. With Europe this week threatening to retaliate against probable US tariffs on European cars, “we slip, ever more irredeemably”, towards an “outright” trade war, says Jeremy Warner in The Sunday Telegraph.

The rise in the oil price to a four-year high is another worry, as it gradually slows global consumption, while in the past few days investors have started to fret about China again. Its stocks have slipped into a bear market and the yuan has fallen sharply. These are “echoes of the plunge in the Chinese market in 2015” when the devalued yuan “threatened to trigger capital flight”, says Stevenson. Europe’s reappearing euro crisis, meanwhile, is doing nothing to alleviate the increasingly jittery mood in world markets.

Earnings growth is slowing

The economic and earnings backdrop isn’t looking too hot, either. The artificial stimulus from the Trump administration’s corporate tax cut will fade in the next year or so, with earnings-per-share growth dropping back from 21% in 2018 to 10% in 2019. Valuations are sky-high. And while the US Federal Reserve is only tightening monetary policy very gradually, the prospect of a sharp hike, destabilising markets and indebted corporations, looms over equities. The labour market keeps tightening, with the share of small businesses raising compensation at a 34-year high. “Accelerating pay rates are likely to provide a big surprise in the second half,” David Levy of the Jerome Levy Forecasting Centre told Barron’s – keep a close eye on Friday’s labour market data. On the other hand, companies could decide they can’t pass on higher labour costs, and absorb them instead, denting their already historically high margins. That won’t do earnings any favours either. Whether it ends with a bang or a whimper, the S&P 500’s long bull market is starting to run out of puff.