3 reasons the stock market’s fundamentals look solid

Earnings are spectacular, interest rates are low, and growth is strong.

  • By Howard Gold,
  • MarketWatch
  • Economic Insight
  • Investing Strategies
  • Investing in Stocks
  • Market Analysis
  • Markets
  • Stocks
  • Economic Insight
  • Investing Strategies
  • Investing in Stocks
  • Market Analysis
  • Markets
  • Stocks
  • Economic Insight
  • Investing Strategies
  • Investing in Stocks
  • Market Analysis
  • Markets
  • Stocks
  • Facebook.
  • Twitter.
  • LinkedIn.
  • Google Plus
  • Print

It’s been more than a month since stocks hit their lows after a much-needed correction, and they’ve recovered much of what they lost.

Before Wednesday’s selloff, the Dow Jones Industrial Average (.DJI) had gained nearly 700 points since Feb. 5, while the S&P 500 index (.SPX) had risen 5%, and was only 100 points off its all-time high of 2,872.87 on Jan. 26. The Nasdaq Composite index (.IXIC), powered by FAANG stalwarts like Amazon (AMZN), Netflix (NFLX), and Apple (AAPL), closed at a record 7,588.32 on Monday.

'Goldilocks' economy lifts markets

With inflation under control, the outlook for U.S. stocks is strong.

Does this mean the correction is over?

Probably, although as my MarketWatch colleague Mark Hulbert and Sam Stovall of CFRA Research both pointed out, we’re entering the weakest six months of the four-year presidential election market cycle, so we’re likely to see a more volatile market than we did last year, which was all calm seas and blue skies.

But markets still move on fundamentals, and this market’s fundamentals look very, very solid for some time to come.

First and foremost, earnings growth has been quietly spectacular.

It’s gotten surprisingly little coverage in the financial media, but as John Butters of FactSet Research noted last week, with fourth-quarter earnings almost completely on the books, 73% of the S&P 500 companies reported earnings that beat Wall Street’s expectations.

That’s par for the course these days, but 77% of those companies also beat revenue estimates, the highest percentage since FactSet began tracking those numbers in 2008. Managements have become masters of fudging earnings numbers, but you can’t fake sales. That speaks to real, organic growth in these companies’ businesses and earnings, which incidentally rose by 14.8% in the fourth quarter, the best since the third quarter of 2011.

As long as earnings keep growing at this pace — and I don’t see any reason why they won’t, given good economic growth and the future impact of corporate tax cuts — markets should move higher. According to FactSet, the S&P 500 is changing hands at 17 times projected earnings for the next 12 months. That’s above the five-year average of 16x and the 10-year average of 14.3x, but it’s far from exorbitant considering earnings growth and still-low interest rates. Which brings us to…

Second, interest rates are low and pretty stable.

Strategies for volatile markets

With the right preparation, you may be able to handle a market drop.

There was lots of fuss and hullabaloo last month when the yield on the 10-year Treasury approached the “magic” 3% at which gurus like Bill Gross and Jeff Gundlach said the 35-year-plus bull market in bonds would end. That yield hit 2.94% on Feb. 21 but has slipped back to 2.83%. Yes, that’s a lot higher than the 2.06% the 10-year yielded as recently as last September, but I’ll start worrying only if yields go well north of 3% and stay there. Until then, doom and gloomers be still.

Meanwhile, the Federal Reserve under new Chairman Jay Powell seems hell bent on…staying the course set by predecessor Janet Yellen. Yes, we may see four increases in the federal funds rate this year instead of the widely expected three hikes if economic growth picks up beyond its magic 3% number. But that would get the fed funds rate to the catastrophic level of — wait for it — 2.25-2.5%.

Sooner or later, even Wall Street’s slow learners will figure out that’s not the end of the world

Third and last, gross domestic product growth looks strong — in the high 2% to 3% range — while inflation is still contained.

Again, every pundit or guru, it seemed, got his or her knickers in a twist when the Bureau of Labor Statistics reported average hourly earnings rose 2.9% annually in January. The inflation wolf was at the doorstep and the Apocalypse was nigh.

Another month, another jobs report, and this time wage increases had settled down to 2.6% again in February, a month that saw the U.S. economy produce 313,000 new jobs. On Tuesday the Labor Department reported that core consumer price index — the CPI minus food and energy — had risen by a mere 1.8% last month, slightly below consensus projections. Can we all stop grinding our teeth about inflation yet?

Strong earnings and economic growth, low interest rates and low inflation — what’s not to like? There are some things to be concerned about (and I’ll get into them next week) but for now investors should take “yes” for an answer.

  • Facebook.
  • Twitter.
  • LinkedIn.
  • Google Plus
  • Print

For more news you can use to help guide your financial life, visit our Insights page.


Copyright © 2018 Dow Jones & Company, Inc. All Rights Reserved.
Votes are submitted voluntarily by individuals and reflect their own opinion of the article's helpfulness. A percentage value for helpfulness will display once a sufficient number of votes have been submitted.
close
Please enter a valid e-mail address
Please enter a valid e-mail address
Important legal information about the e-mail you will be sending. By using this service, you agree to input your real e-mail address and only send it to people you know. It is a violation of law in some jurisdictions to falsely identify yourself in an e-mail. All information you provide will be used by Fidelity solely for the purpose of sending the e-mail on your behalf.The subject line of the e-mail you send will be "Fidelity.com: "

Your e-mail has been sent.
close

Your e-mail has been sent.