That’s the most common question I have been getting recently. For those of you who haven’t ask it yet, my answer has been… “it depends on earnings.” Now, that’s a somewhat flip, simple answer and there is a lot more that goes into it, so here’s a quick summary of where we have been and what we might expect going forward.
Since late February, the S&P 500 has been largely “stuck” between 2300-2400. The market has been fairly resilient considering we’ve seen a plunge in 10-year bond yields, lackluster economic data, and no real political progress in Washington.
And, the main reason for that resilience has been earnings and valuations. Here’s the reason I say that.
The Q1 earnings season was better than expected. At the higher end of that range, the S&P 500 is trading at 17.4X next year’s earnings. That’s high historically to be sure, but it’s not crazy given Treasury yield levels and expected macro-economic fundamentals.
Risks to be aware of… Just because the outlook is positive now, it doesn’t mean it’s going to stay that way.
Right now, we are doing OK with the higher valuations based upon these three factors:
1) Low interest rates
2) A strong and growing US & global economy
3) Calm geopolitical horizon
That also means the risk for this market exists in one of three forms:
Risk 1: Rates rise faster than expected (not an immediate threat, but a longer-term concern).
Risk 2: US and global economic growth disappoints
Risk 3: We get some sort of a geopolitical surprise: Military conflict, terrorist attack, snap elections in Italy.
While I spend a lot of time trying to identify what’s really driving markets so we can be properly positioned, I also spend a lot of time identifying tactical, macro-based, fundamental opportunities that can help minimize risk and take advantage of opportunities. Be on the lookout for emails from me with portfolio changes, or calls from my office to set up an in person meeting.
I hope this quick update and insight into my thoughts was helpful. As always, please contact me with any thoughts or questions. I’m happy to help.
Thank you for your continued trust and confidence in me!
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.