6 factors to watch as the bull market pushes toward an endurance record
In three weeks or so, the stock market is likely to make history as the longest bull market on record.
Some on Wall Street, like Michael Hartnett, chief investment strategist at Bank of America Merrill Lynch, have already started the celebratory countdown: "Champagne for US stocks: 14 trading days to go until S&P 500 bull market becomes the longest of all-time [at] 3,543 days," he said in a note.
Stocks took another step toward this exalted status this week, with all the major indexes finishing higher on Friday. The S&P 500 rose 13.13 points, or 0.5%, to 2,840.35, extending its weekly winning streak to five weeks. The Nasdaq Composite Index added 9.33 points, or 0.1%, to end at 7,812.01 and wrap up a weekly gain of 1%. The Dow Jones Industrial Average climbed 136.42 points, or 0.5%, to 25,462.58, edging up 0.1% for the week.
But even if the odds of the bull market setting an endurance record are good, it could be a rough ride for investors in the coming days and weeks as heightened trade tensions, among other obstacles, increasingly overshadow what has largely been a strong earnings season thus far.
Here are some of the marquee issues investors will have to contend with as the market navigates its way toward the record:
1. Earnings
Second-quarter earnings have been stellar, with S&P 500 companies reporting earnings growth of 24% and sales increase of 9.8%, according to John Butters, senior earnings analyst at FactSet Research.
Some 80% of companies releasing quarterly results are beating estimates, and if that number holds it will be the highest percentage of companies posting positive earnings surprise since FactSet started tracking such data in the third quarter of 2008, according to Butters.
This strong growth in corporate earnings is likely to continue in the second half of the year, giving the market a crucial boost going forward, said Jonathan Golub, chief U.S. equity strategist at Credit Suisse Securities.
"This quarter's spectacular results are projected to continue in [the] third quarter and fourth quarter, with expectations of 23% and 21% bottom-line growth," he said.
2. Economy
The U.S. economy continues to expand at a steady clip. Gross domestic product grew 4.1% rate in the second quarter, ita fastest pace in almost four years.
On Wednesday, the Federal Reserve kept the key U.S. target interest rate unchanged but upgraded its view of the economy to "strong" from "solid," signaling it will hike interest rates in the coming months.
According to Kent Engelke, chief economic strategist Capitol Securities Management Inc., that is only the second time this century that the central bank has referred to the economy as strong. "The only other time since 2000 that the Fed has described economic growth as strong in its policy statement was May 2006, just after the GDP posted a 5.4% annualized increase," he said.
3. Market breadth
There are some concerns that the market's breadth, which gauges the direction and health of the market based on the number of gaining stocks versus decliners, has deteriorated recently.
"The Nasdaq Composite made new highs in July, but these gains came as upside participation dwindled and momentum remained lackluster. The July peak in the Nasdaq Composite came with only 50% of the stocks in the index trading above their 50-day averages (down from 70% in June) and only 55% even trading above their 200-day averages (down from 60% in June)," said William Delwiche, an investment strategist at Baird.
However, Brian Belski, chief investment strategist at BMO Capital Markets, stressed that investors should not doubt the resilience of the U.S. market, noting that recent gains have been "largely broad-based and balanced across market caps."
4. Market valuations
Current valuations are generally viewed as elevated versus historic levels, with the S&P 500 trading at roughly 21 times trailing 12-month earnings, according to Terry Sandven, chief equity strategist at U.S. Bank Wealth Management.
But that is lower than the 23.5 times recorded in late January when the large-cap index hit an all-time high.
"So even though the S&P's price only sits a couple [of] percentage points below the January high, valuations now look a lot more attractive than they did then," said analysts at Bespoke Investment Group.
5. Trade conflict
The U.S. and China -- the largest economies in the world -- have been engaged in a tit-for-tat on tariffs, as President Donald Trump pursues a hardline stance against key partners/adversaries on the trade front. The Trump administration this week said it would move to impose a 25% tariff on an additional $200 billion's worth of Chinese imports versus the 10% previously proposed. In response, China threatened to slap tariffs of up to 25% on $60 billion in U.S. goods.
"This latest round of Chinese tariffs should come as no surprise to the United States. With 16% of total U.S. trade derived from trade with China, and 14% of China's trade derived from trade to the U.S., neither country has an incentive to blink first," said Mark Rosenberg, chief executive of GeoQuant.
"Geopolitical risk will continue to weigh on markets, and a more turbulent trade war will ensue in the weeks to come, with China punching back on alternative fronts like North Korea. These dynamics will dampen global economic growth in quarters three and four. As this continues, President Trump risks hurting the strong economic growth that he has achieved throughout the first two quarters of 2018," he said.
6. Bull-market correction:
Doug Cote and Karyn Cavanaugh, strategists at Voya Investment Management, had an interesting observation regarding the Dow Jones Industrial Average's current sojourn in correction territory.
"There is confusion about whether a correction and a bull market can coexist. The answer is unequivocally yes and it is in fact healthy to have not only corrections but swift rotations in equities between growth/value, large cap/small cap and domestic/international. This bull market was started, was fed and got fat on monetary accommodation and now is getting lean, mean and chiseled on animal spirits driven by pro-business tax cuts. China and Europe are still fat on accommodation and undoubtedly are going to be disrupted until they compete on a pro-business platform. This may cause corrections but ultimately is positive for the global markets as this double-header bull market begins -- with USA in the lead."
If the Dow does not exit correction territory as of Monday's closing bell, it will mark the longest period the blue-chip index has remained in correction since the 130-day stretch ended on Sept. 25, 1973, according to Dow Jones Market Data.