As the summer approaches the stock market is near it's high powered by strong earnings reports and increased business confidence that has led to higher business spending. Let's dive in.
Analysts' earnings expectations for the S&P 500 have consistently been too optimistic during this economic recovery. In fact, going back to 2012 every year has seen earnings come in at less than half of initial forecasts. If this pattern can be reversed we could see added fuel for the stock market in the coming years.
With close to 70% of companies in the S&P 500 having reported their first quarter numbers, we have seen earnings growth in excess of 10% compared to the first quarter of 2016. That reverses a trend over the previous eight quarters of earnings declining on average. While this is a great start to 2017, there obviously is a long way to go for this to become a trend.
Small Business Update
Small businesses make up 64% of net new private-sector jobs in the United States. So it is good news that small business owners are the most optimistic they have been in the last thirty years about the economic outlook. The results of the presidential election contributed to this as business owners are hopeful for tax reform, regulatory reform, infrastructure spending and a new health care plan that will reverse two decades of policy mistakes by both parties. Of course no one knows what exactly will get passed and become law, but optimism for pro-growth polices appear to already have changed behavior as business capital spending jumped 10% in the first quarter compared to the first quarter of 2016. Capital spending includes expenditures on items like property, plant and equipment. Since the 2008 crisis, many businesses have been very hesitant to increase capital spending and that has been one of the big reasons economic growth (as measured by GDP) has been so sluggish during the recovery.
The Federal Reserve
The Federal Reserve is expected to raise interest rates when they meet again in June. This would be their second increase of 2017 and third increase since last December. We have felt for a long time that the Fed should have been raising rates twice a year going back to 2013. 0% interest rates made sense during the financial crisis, but were kept too low for too long. If the Fed does raise rates in June it would set the table for a third increase during the second half of the year. It will be important for the Fed to not push for a fourth increase in 2017 as the cumulative effect of five increases in thirteen months could have negative ramifications for the economy here and around the globe.
Second quarter earnings reports, small business behavior and the Fed's June decision will give us more information about what the economy and the markets will have in store in the second half of 2017. In addition to these issues there are always developments in China that will have an investment impact, and we will have see what kind of progress is made in Washington regarding everything from tax reform to infrastructure.