• Wealth Management

Why Stocks Should Rise From Here

Some investors are worried we’ve seen the best this economic cycle has to offer, but here’s why that concern is premature.

The market has taken investors on a rollercoaster ride this year that shows no sign of slowing. Remarkably, as April comes to a close, the S&P 500 is nearly unchanged, even though corporate earnings have surged -- up nearly 25% for the first quarter. 

Investors have had good reason to wonder if this is as good as it gets for stocks and the economy.  Businesses and consumers face higher costs as inflationary pressures and interest rates rise. Last week, 10-year Treasury yields reached a four-year high, briefly topping the psychologically significant 3% mark. Commodities and labor prices are higher, eating into corporate profit margins.

While these pressures are real, I believe it is premature for investors to assume the market has peaked. Here are five reasons why I don’t think the bull market is going to end soon:

  • Global economic growth remains above average thanks to ongoing economic stimulus and increased capital spending. Global GDP growth is expected at 3.8% in the second half of this year and next. That’s up from the 3.4% average from 2012 to 2016. Even in the U.S., there is room for continued economic growth due to fiscal stimulus and deregulation.
  • Inflation, although higher, is unlikely to surge. I expect it to remain restrained due to labor market slack and the deflationary force of technological advances.
  • Interest rates will remain moderate adjusted for inflation, even as the Federal Reserve keeps hiking. The Fed is still in the process of normalizing monetary policy after pushing rates to near zero following the financial crisis. It’s not trying to restrain growth.
  • Productivity gains due to increased capital spending on technology will offset some of the pressures on profit margins. Deregulation will help curtail costs, too.
  • Valuations remain attractive. With the S&P 500 price/earnings ratio at 16, down from 18 earlier this year, stocks don’t seem overpriced. 

Bottom Line: Markets typically peak six months before a recession and I think one is unlikely before 2019 or 2020.  Markets can move higher in the next six months, but will likely rotate from old leaders to new leadership. I continue to think more defensive sectors like energy, financials, industrials, health care and “old” tech make the most sense now.

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