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US stocks hitting fresh highs

US stock markets have made great strides this year, but, supported by rising earnings and a rebounding economy, look well-positioned to keep rising over the medium term.

US stocks hitting fresh highs

‘US stocks hit record highs’. This is the almost daily headline in the financial media. Just over a year after the Covid-19 pandemic hit, and major economies were shut down, the American economy, or at least its stock market, is back at its old routine of making new highs. This time around it has been joined by some European indices, but others around the globe (like the FTSE 100, or markets in China) remain well off their highs for the year, or even their pre-Covid-19 peak.

The Covid-19 pandemic is still not over. The Delta variant is still prevalent in many countries, not least in the US, and other variants are appearing too. The post-Covid-19 pandemic world is still evolving, and the exact future of work and other activities is still to be determined. Despite all that, the US stock market is roaring. Led by the S&P 500 and the Nasdaq, equities in the US are continuing to rise, and while the Dow and the small-cap Russell 2000 are lagging behind, the overall trend higher is prevalent across most US indices and sectors.

Investors looking for an answer as to why this is the case generally need to look no further than earnings. Quarter two (Q2) earnings season is still in progress, although almost all the major names have reported now and the overall trend is clear. Data from Lipper shows that earnings for the season have risen an astonishing 148% compared to a year earlier, while revenues are up by a very commendable 24% as well. Leisure, luxury goods and hotels, restaurants and other leisure pursuits lead the way on both these metrics. Meanwhile earnings revisions have been almost universally higher, and dramatically so, as analysts scramble to keep up with the impressive recovery in US corporate activity.

Stocks have enjoyed an excellent year; indeed, 2021’s performance for the year so far is the sixth best in the history of the S&P 500. While past performance is no guide to the future, previous instances where the January to August period has been as strong or stronger have been almost always positive as well. There is one huge exception, and that is 1987, when the index finished 25% lower for the rest of the year, but that is the outlier.

It is not just the price that is doing well. 2021 has seen more new all-time highs so far than for the next ten best performing years for January to August. As September gets underway, the cumulative advance-decline line, which measures the number of stocks going up minus those going down, has also moved back to a record high. Three-quarters of the S&P 500 are above their 200-day moving average (DMA), a sign that the index’s rally is not lead by just the big stocks.

Overall, we can expect the stock market in the US to make further headway as 2021 goes on. Earnings are powering higher, and the economy is expected rebound further as well. This is not a rally that is just based on the Federal Reserve's quarterly earnings (Fed’s QE) programme, nor will it falter once the much-anticipated ‘tapering’ of asset purchases gets underway. Of course, this does not mean that there will not be volatility along the way. 2021 has been remarkably quiet, with only one 5%+ selloff so far. Whatever happens, it is unlikely that 2022 will be as quiet. But the trend in earnings, gross domestic product (GDP) and the index price itself is clear, and would support a guardedly-bullish outlook for the months ahead.

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Publication date : 2021-09-08T09:52:03+0100

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