The Rally Continues
Key Takeaways from Fourth Quarter Earnings
The market rally continues, with stocks off to their best year’s start since 1991.
Near-term stocks are quite overbought and a pullback could be warranted.
Yet, from a sentiment perspective, we still aren’t seeing signs of the over-the-top optimism that is consistent with major peaks.
That Was The Easy Part
Earnings growth for the fourth quarter is tracking to a solid 17%, above prior estimates but below the pace of the previous three quarters.
The bar has been substantially lowered for the first quarter, setting up potential upside surprises, particularly if trade uncertainty is diminished.
We expect S&P 500 companies will be able to at least deliver mid-single-digit earnings growth in 2019, driven by solid economic growth, fiscal stimulus, and share buybacks.
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Stocks posted their best January in more than 30 years after a historically bad December.
Stocks’ bounce was the easy part; the next 10% will likely be much harder.
There are technical signs that suggest December marked a major low and potentially higher prices are ahead.
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Fourth Quarter Earnings Preview: From Great to Good
We expect the Fed to pause interest rate hikes this week.
While the market environment has been challenging, we think recent weakness increases the chances of a positive market response post-tightening cycle.
Whether the Fed’s rate hike campaign is already over, or will end fairly soon, history indicates that doesn’t suggest a recession is right around the corner.
Lower Valuations Offer Long-Term Opportunity
S&P 500 earnings growth will slow in the fourth quarter but is still expected to be strong.
U.S. economic growth, tax cuts, higher oil prices, and corporate stock buybacks are among the positive drivers.
However, earnings may be capped by trade tensions, slower economic growth abroad, and a rising U.S. dollar.
A significant drop in stock market valuations may portend above average stock market performance, based on history.
Stocks also look attractively valued relative to bonds based on a comparison of earnings yields.
Though it is difficult to think long-term during volatile market environments, low valuations have been closely tied to future positive long-term stock performance.
Strong Week Ahead of Big Weekend
Last week’s losses were driven primarily by increased recession fears related to U.S.-China trade tensions, a possible Fed policy mistake, and sharply lower oil prices.
Recent volatility may have provided one of the most important ingredients of a stock market bottom: fear.
We see elevated put/call ratios, increased trading volume, and extremely negative breadth as signs of fear, a potentially bullish development with the S&P 500 at/above recent lows.
Last week’s stock market rally was driven by optimism (now clearly warranted) surrounding U.S.-China trade talks and a more dovish Fed.
The events added to the positive fundamental case for stocks here, while stock valuations are quite reasonable.
The technical picture is muddled, but big gains to start this week—should they hold—would help increase the odds of further gains from a technical analysis perspective.