Strong Growth Continues

Friday, March 9th marked 9 years since the US stock market bottomed during the Great Recession of 2008-2009. We have witnessed excellent stock market and economic growth since those dark times, leading many people to ask the question: “How long can this expansion/rally continue?”

Before we answer that question, a short stock market history lesson is in order. While the US stock market has in fact rallied an incredible 380% since the stock market bottom (as measured by the total return of the S&P 500 Index), it has not been without significant drawdowns:

  • From July 7, 2011 – October 3, 2011, the S&P 500 Index lost 18.4%. During that same time period, the global stock market (as measured by ticker ACWI) lost 22.5%.
     
  • From May 19, 2015 – February 11, 2016, the S&P 500 Index lost 12.8%, while the global stock market was down 19.1%.

So, there have been “breathers” (that’s a nice way of putting it) during this period of sustained economic and stock market growth. In other words, we have taken our lumps along the way.

What does the picture look like today?

US companies are as strong as they have ever been. “S&P 500 revenues rose to a record high of $329.41 per share at the end of last year,” according to the astute Dr. Ed Yardeni of Yardeni Research, Inc.

sp500 graphic 1.gif

When it comes to corporate earnings, some skeptics warn that accounting “tricks” can at times prop up earnings to make them look artificially rosy. Revenues, on the other hand, are much harder to “manufacture” or “prop up.” What you see is what you get.

Earnings growth is also in eye-popping territory, with year-over-year growth of 15.3% during the 4th quarter:

sp500 graphic 2.gif

Why does earnings growth matter to you, the investor?

Over the long-term, stock market trajectory correlates highly with corporate earnings growth. When companies earn more money, the stock market generally goes up. The relationship between the two is not lock-step, but it is a very clear relationship.

Analysts currently estimate 2018 earnings for the S&P 500 at $157.92 (which would be a 19.1% year-over-year gain). Based on today’s current price of the S&P 500 Index at 2,715, that equates to a Forward P/E (price-to-earnings ratio) of about 17.2. While that’s not “cheap”, it’s not expensive. You will note that since the start of the above chart in 1999, the average P/E during this period has been 18.5.

The usual disclaimers apply: short-term price movements in the stock market are impossible to predict; and economic growth can slow down (or turn negative) seemingly without warning. However, we hope this post helps you understand how very real this stock market is. It’s not founded upon wishful thinking or irrational exuberance about President Trump’s business-friendly policies.
 

Sources:
1) http://blog.yardeni.com/2018/03/dow-vigilantes.html
2) www.ycharts.com
 


Because The Wealth Group, Austin B. Colby & Associates is independent of Raymond James, the expressed written opinions above are our own and not necessarily reflective of Raymond James’ opinions.