S&P 500 hits fresh record high
Look Ahead: Equities
On Friday afternoon, the Standard & Poor's 500 Index hit a fresh record high. This happened minutes before the University of Michigan released its closely watched consumer sentiment index. It showed a surprisingly large drop to 93.6 from 98.1 in January, which was admittedly an 11-year high. This came after data on Thursday showed January retail sales dropped 0.8% month-over-month, while claims for unemployment benefits surged by a surprisingly large 25 thousand applications last week. If such weak data is not able to stop the S&P in its tracks, what can? How about the fourth quarter corporate earnings results?
Well, these too have been relatively poor so far. With almost 400 of the S&P 500 companies having reported their results, the annual revenue growth stands at just 1.6% while earnings growth is at 4.2% – both sharply lower from the previous quarters. While on average more companies appear to have beaten analysts’ estimates, this is only because the analysts were trimming their expectations leading up to the reporting season. If you take Apple out of the equation, things will have looked even bleaker. Some companies CEOs have blamed the stronger dollar for their earnings results and given that the greenback has continued its upward trajectory in this first half of Q1, results for this quarter may well turn out to be similar to, or even worse than, Q4.
Meanwhile going into the weekend, the situation regarding Greece remains unclear. Talks between the Greek finance minister and his Eurozone counterparts this week ended with no agreement. As another meeting is scheduled for Monday, this means that the so-called “Grexit” risk may remain in place for at least the start of next week. That said, the investor sentiment has been soothed by news that a ceasefire has been agreed between Russia and Ukraine, effective on Sunday.
So, against these backdrops, why are U.S. stocks at record highs? We think it is because of the record-low interest rates and expectations they will remain near historic lows even after the eventual first hike that are helping to keep investors in the stock markets. Granted, there have been reports recently that suggest funds are flowing out of the US equity markets and into Europe, where the European Central Bank has recently announced quantitative easing. If this trend persists it may mean that the US stocks will underperform Europe, even if the U.S. economy actually continues to outperform. However, with inflationary pressures being almost non-existent across many developed economies, including the US, the Federal Reserve will be in no hurry to raise interest rates.
In fact, this week’s U.S. economic numbers were rather poor. Although the dollar and equities are unlikely to end their bullish runs on the back of a couple of economic indicators, the outlook may change if the trend of weaker U.S. data continues for some time. But even if the US dollar continues to climb higher this will exert pressure on US exports and also company earnings, which would not be good news for US stocks in the long-term. But in the short term, the weaker economic numbers may push rate hike expectations further out, which can arguably be net positive for US stocks. In any case, we expect to see only moderate further gains for US equities compared to recent times but we are still nonetheless overall bullish.
Indeed, the near-term technical outlook remains bullish for the S&P 500. As we reported last Thursday, the major US indices turned higher on the year following a hiccup in January. The daily chart of the S&P is looking rather constructive after it broke out of a pennant consolidation pattern to the upside last week. But as one would have expected, the index did struggle around the 2070 resistance level (previous high and 78.6% Fibonacci level) for some time before the buyers stepped in around the 2045 support level (50-day moving average and the upper side of the broken trend) on Monday which helped to push the index to a new high for the year.
On Friday the S&P momentarily traded at a fresh record high of 2094 as it surpassed its December peak. If the index closes above this level on Friday or early next week then the bulls may target the Fibonacci extension levels at 2125 (127.2%) and then 2165 (161.8%) next. Meanwhile a potential closing break below 2070 would be a bearish development and things could get worse if the 2045 support level is also taken out. As things stand however, the technical outlook looks bullish for the reasons stated above.