The stock market’s performance this year has been nothing short of spectacular.
The S&P 500’s
nearly 21% advance year-to-date marks the best run for the index through July 26 since 1997, according to Dow Jones Market Data, and the Nasdaq Composite
as had an even better run, up 25.5% on the year. The Dow Jones Industrial Average
, meanwhile, has been not far behind; it’s up 16.5% since the start of 2019.
But with the S&500 already sitting comfortably above many strategists’ year-end targets, some analysts and investors are approaching the rest of the year cautiously, as rising valuations, policy uncertainty and economic weakness abroad raise questions as to how long the stock market can keep up its torrid pace.
“I thought 2,950 would be a ceiling for this year, and we are already higher than it,” Bob Doll, chief equity strategist and senior portfolio manager at Nuveen, told MarketWatch, predicting the “market will go nowhere” in the second half.
“Price-to-earnings ratios have gone from 13 to 17.4, and earnings estimates are still too high for next year,” Doll said, adding that higher valuations and future reductions in earnings estimates will be headwinds for stocks in the second half, along with a Federal Reserve policy that he predicts will be more hawkish than the market expects, unless a more damaging economic downturn materializes.
While second-quarter GDP growth reflects a slowing but healthy U.S. economy, data abroad show a worsening slowdown, which will likely affect U.S. markets one way or another. Mike O’Rourke, chief market strategist with JonesTrading, wrote in a note to clients that commentary Thursday from European Central Bank President Mario Draghi on the economic outlook in Europe — which he said is “getting worse and worse” — helped put a damper on investor enthusiasm during a week that otherwise saw markets moving higher on better-than-expected earnings.
“It was [Draghi’s] candidness that spooked markets [Thursday],” O’Rourke wrote. “The PMI readings in key economies have been at or hovering near recession levels all year. In the first quarter, German GDP grew at 0.4%, and Italian GDP grew at 0.1%. Those two economies constitute 44% of eurozone GDP, and the data has not exhibited much improvement in the second quarter.”
The U.S. economy has so far remained unfazed by a weakening European economy, but at the very least slowing growth abroad will affect the U.S. stock market through a stronger dollar.
“Dollar strength is a headwind for stocks, but the market seems to be giving it a pass in earnings reports,” said Tom Martin, senior portfolio manager at Globalt Investments. “They are paying more attention to constant currency more than the dollar. It does that for a while until it doesn’t, and, if you get the feeling that the dollar is going to be a problem on a sustained basis, the market will adjust.”
That said, there’s no reason stocks can’t continue to deliver healthy returns, just because their valuations have risen so impressively in the first seven months of the year. During 2013, the S&P 500 advanced 29.6% (for its best one-year performance since 1997), and equaling that 2013 performance this year would require another 7.4% advance from here on out.
Meanwhile, more bullish investors argue that the timing of last year’s nearly 20% correction — contributing to the S&P’s full-year decline of some 6.2% — has skewed the calendar-year performances of stocks in 2018 and 2019, skewing last year’s performance to the downside and making this year’s gains more impressive than they might otherwise be.
“Year-to-date it’s a good run, but from a longer-term perspective equities have not done very much over the past 18 months,” Aaron Anderson, senior vice president of research at Fisher Investments, told MarketWatch.
“Markets are flat from 2018, small caps are still well below their peak, [and] it’s not as if the strong run this year reflects an excessive amount of optimism,” he added. “We would say there is plenty of room to run.”
The Federal Reserve’s interest-rate-setting committee will conclude a two-day meeting on Wednesday, July 31, and, while a quarter-point rate cut is widely expected, the accompanying statement and press conference by Chairman Jerome Powell may provide more clarity about the future pace of rate hikes — with markets currently pricing in two to three cuts this year and two more next. A ratcheting back or confirmation of those expectation will likely pay a key role in investor sentiment in the coming weeks.
Other data on tap include a fresh reading of the PCE inflation index, the Fed’s preferred measure of price growth; the latest reading of the Case-Shiller home-price index; and the National Association of Realtors pending-home-sales index, all due on Tuesday.
Along with the Fed announcement, on Wednesday, a new reading of the employment cost index and ADP’s estimate of July private-sector job growth will be issued. Thursday will feature a print of the ISM manufacturing index for July, as well as an estimate of June construction spending.
Friday will feature the all-important nonfarm-payrolls report, as well as data on consumer sentiment in July and factory orders for June.
The week will also feature another heavy round of corporate earnings reports, with Dow components Apple Inc.
, Procter & Gamble Co.
and Pfizer Inc.
issuing earnings results Tuesday, alongside Mastercard Inc.
and Merck & Co.
Wednesday will see second-quarter earnings reports from Qualcomm Inc. and General Electric Co.
, and a day later Dow constituent Verizon Communications Inc.
is set to announce results, as are Cigna Corp.
, General Motors Co.
and DuPont de Nemours Inc.
Friday will feature the reporting of quarterly results by Exxon Mobil Corp.
, Chevron Corp.
and Burger King parent Restaurant Brands International Inc.