Current/ May 2017 Outlook

The S&P 500, the Nasdaq Composite, the Nasdaq 100, and the Russell 2000 have all hit record highs in the past few weeks, but the excitement surrounding those performances and mile marks has been muted.

Our view on the matter is that the normal celebrations that go along with record highs has been stifled by continued questions about the risk-reward assessments of the market.  That assessment is currently recognizing the stock market isn’t trading at historically cheap valuations after pricing in a lot of good news and the expectation that more good news is sure to follow.

Looking at the S&P 500, the current Price/Earnings ratio of the index is elevated against historical averages.  As of last Friday, the trailing twelve-month P/E ratio stood at 23.76 according to the Wall Street Journal.  The higher than average valuation of the market is beginning to give some investors reason to worry, but our research continues to show that the market could have more room to grow.

The earnings season, more than half way through its run now, has provided a brighter than expected view.  As of May 5, 66% of the companies that had reports had topped Wall Street’s revenue expectations while 75% had exceeded earnings per share (EPS) expectations.

Adding to the positive earnings news, the earnings growth rate for this quarter is currently running at 13.5%.  If the earnings season were to have stopped now, it would mark the highest year-over-year earnings growth rate since the third quarter of 2011.  In all, from an aggregate view, the improved earnings picture is helping to override concerns regarding the market being overvalued.

So, what can hold stocks back right now?

Last month we talked about the “honeymoon” being over for the Trump Administration.  This continues to be a common theme as we have moved past the first 100 days of the new presidency.

The political sparring on important subjects such as health care reform, changes to financial regulations, changes to tax code, budget cuts and a myriad of other items is beginning to wear investor’s nerves.  This doesn’t even include the ongoing and growing geopolitical situations in what feels like every corner of the globe.

At the current time, this appears to be what is continuing to reign the market in from making a real run higher.  Investor’s confidence in the market should improve if/as we begin to see the political winds shift away from the rhetorical sideshow that has captivated the media to more calm and productive action-based government.

For now, the slow and steady move higher appears to be able and ready to continue, Our expectations for a potential summer rally will increase as soon as the political climate begins to bear less volatility and focus more on the true matters at hand.

An investor cannot invest directly in an index. The opinions and forecasts expressed are those of the author, and may not actually come to pass. This information is subject to change at any time, based on market and other conditions and should not be construed as a recommendation of any specific security or investment plan. Past performance does not guarantee future results.