A monitor displays stock info on the floor of the New York Stock Exchange, July 11, 2016.Eric Thayer/Bloomberg
Investors continue flocking to U.S. equities, driving the S&P 500 to a record high Monday. The immediate driver was the healthier-than-expected American jobs report Friday, fanning hopes that a rejuvenated economy could boost U.S. earnings and sustain the aging bull run without triggering an interest rate hike by the cautious Federal Reserve.
Underlying the strong rebound in U.S. equities are deepening concerns about the health of other industrial and key emerging economies, including a post-Brexit Europe and stumbling China. Faced with record low and increasingly negative bond yields, global capital is on the prowl not only for safe harbours like gold but increasingly scarce real returns. For many, betting on a U.S. recovery – and a quiet Fed – has become one of the few games still worth the risk in volatile markets.
The S&P index closed at 2,137.16, up 0.3 per cent from Friday and its first record performance since May, 2015.
It was the longest such drought for the broad stock gauge in more than 30 years, excluding bear markets. Since hitting its most recent low-water mark during a rough February, the index has soared more than 16 per cent.
The narrower Dow Jones industrial average climbed 0.4 per cent to 18,226.93, just below its high-water mark, set last year. The Nasdaq composite index also rose, thanks to a surge in demand for tech stocks.
"The bulls are in firm control of movements in markets, and we can see this quite clearly in various U.S. equity markets," IG's chief market strategist, Chris Weston, said in a note.
U.S. stocks are pricey by normal standards, "but I am not sure market participants are too concerned," Mr. Weston writes, adding that equities have room to move higher. "To get the bulls really excited, we are going to need to see earnings improvement."
That could be a tall order. U.S. corporate profits are in the midst of their worst recession since the financial crisis – six quarters and counting – and no bright lights are visible at the end of this tunnel.
Alcoa, the first U.S. company out of the chute, reported weaker second-quarter profit Monday, citing lower aluminum prices, among other reasons. That indicates the troubled state of global industrial demand. But will companies focused heavily on the U.S. market fare better? Not according to recent estimates.
"The current U.S. earnings recession will not end in [the second quarter]," Goldman Sachs's market strategist David Kostin said in a gloomy note to clients, warning of the added risks posed by "rising political uncertainty, unstable global growth prospects and decelerating [stock] buybacks."
Consensus estimates indicate that S&P 500 adjusted earnings per share [EPS] fell by 3 per cent in the quarter, Mr. Kostin writes. "We expect that growth using operating EPS, S&P's preferred metric, will also be negative, marking the seventh consecutive quarter with negative … growth. This has never happened [since 1967] outside of an economic recession."
Assuming the Fed sits tight on loose monetary policy, U.S. banks are in for a particularly rough ride, with only one of the major players, Wells Fargo, forecast to reach a double-digit return on equity.
Paced by downbeat results from the financial sector and Apple, the S&P 500 will fall as much as 5 per cent to 10 per cent from its current lofty perch, Goldman predicts.
With such a profit outlook, "it's incredible to think U.S. equity markets are testing the all-time highs," Mr. Weston said.