“Nothing gets in the way of the equity bulls,” says Ipek Ozkardeskaya of Swiss banking group Swissquote. Despite shortages of semiconductors and workers, the energy crisis and ongoing pandemic-induced dislocations, stocks are at record highs.
Strong earnings
America’s S&P 500 index produced its best weekly performance in almost three months last week. The momentum continued into this week. On Monday all three big US indices – the S&P 500, the Dow Jones Industrial Average and the tech-focused Nasdaq – closed at record levels, say Caitlin Ostroff and Alexander Osipovich in The Wall Street Journal.
On the other side of the Atlantic, the pan-European Stoxx Europe 600 also hit an all-time peak; France’s CAC 40 posted its first record close in 21 years. Fears that global supply-chain problems would erode earnings have been eased by a strong third-quarter earnings season in Europe and on Wall Street. “About 82% of S&P 500 companies that have reported so far... have beaten analysts’ earnings forecasts.”
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US stocks have bounced back from a rough patch in September, when they fell by more than 4%, says Maggie Fitzgerald for CNBC. The S&P 500 gained 7% in October. Up 24% since 1 January, American stocks look on course to finish the year in good spirits: historically, “when the S&P 500 is up more than 20% in the first ten months of the year, performance…for the remainder of the year was positive every time, according to Bespoke Investment Group”.
November heralds the start of “the best three-month stretch… for stocks”, says Jacob Sonenshine in Barron’s, with an average return of 3.4% during the three months to the end of January. That’s not just “happenstance”. Many Americans wait until the end of the year before putting money into their investment accounts. The buying often drives an end-of-year rally.
Trouble ahead
US corporate earnings growth is set to slow sharply in the year ahead, says Mark Hulbert for MarketWatch. Forecasts from Standard & Poor’s show that earnings per share are expected to grow by 84% year-on-year during the third quarter. Such a huge gain is unsurprising after a pandemic-blighted year, but the outlook further ahead is less impressive: come the final quarter of 2022 earnings may be growing at just 10% year-on-year. As markets are forward-looking it may not be long before that starts to feed into weaker stock prices.
The list of challenges facing the world economy (and thus profits) is growing, says Tom Stevenson in The Daily Telegraph. “Inflation, broken supply chains, rising energy costs”, tighter money, high valuations and “stretched profit margins”. During the past 60 years, US stocks have endured at least one correction – a drop of 10% – during the three years after every big bear market’s bottom. Yet a year-and-a-half on from the March 2020 market nadir and the S&P 500 has still not had a double-digit decline. “Even if it is not imminent, a correction will happen at some point.”
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