The S&P 500 briefly hit 3,000 today — something that has never happened in history – before closing slightly below this level. Can the markets keep on roaring higher purely on the hope of favorable monetary policy? Not unless the Fed plans to embark on a new rate-cutting cycle — a “one and done” move won’t change corporate behavior or quell uncertainty, in our opinion. With liquidity so plentiful already, we believe a single move will likely have little impact.
Without traditional evidence to support a cut, the Fed is left with fuzzy logic to demonstrate that it is not slavishly catering to the markets’ whims, or worse yet to the President’s. Or, on the other hand, that the global economy is so fragile that it needs emergency resuscitation. “Correcting” the 25 bp mistake that it made in December seems to thread this needle – no harm, no foul, right?
The markets have moved higher, even as expectations about corporate earnings have continued to decline. According to Bloomberg, Wall Street analysts have lowered their full-year earnings estimates for the S&P 500 from $172 in January to $166 today. The net result is that the market’s multiple has expended from roughly 15x to 18x over the same time period. Not expensive from an historical perspective, but certainly full-priced in our opinion.
Remember how everyone was counting on a second-half earnings recovery just a few months ago? Not anymore – and yet, the market hasn’t blinked. And it could get worse. Bloomberg Intelligence suggests that the earnings guidance analysts are getting from companies is the worst since the first quarter of 2016. According to their calculations, more than 50% of the 51 S&P 500 companies that have provided second-quarter guidance have revised their forecasts lower. And that “recovery” we were all counting on seems to have been pushed out to at least the 4th quarter or to 2020 entirely.
Ultimately, we believe that easy money assumed above has to translate into more economic activity and higher corporate earnings. From our perspective, without a sustained rate-cutting cycle and follow-through from corporate earnings, the air will eventually come out of the market’s balloon. Fundamental to our approach is the belief that, ultimately, demonstrated earnings growth and the ability to maintain earnings momentum over time drive returns for individual companies.
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