The S&P 500’s current bull market surpassed all others to become the longest ever a fortnight ago, before going on to hit an all-time high a week later. It’s now less than 100 points away from hitting 3,000.
The index, which tracks the 500 largest companies in the US, is up 8% year-to-date; though that is eclipsed by the 17% gain from NASDAQ, the stock exchange that is home to tech giants such as the FAANGs.
Many commentators have called into question just how long the market can continue in this vein. The US has conflicting factors at play – strong economic and corporate earnings growth, versus high valuations.
As a result, some firms, including Heartwood Investment Management, are currently neutral on US equities. Michael Stanes, investment director at Heartwood, explains his firm’s stance reflects three supportive factors: strong US growth, the tax stimulus and strong corporate profits.
“We believe these should carry the market forward for the time being. However, we have an eye to high US equity market valuations and are watchful of the relative attractiveness of other markets as they lag this US outperformance.”
But others are more constructive on the case for US equities for a number of reasons. Firstly, as the old adage goes, bull markets don’t die of old age. “Just because a bull market has been long, you can’t use that to predict the end of it,” says Janet Johnston, portfolio manager at active ETF provider TrimTabs Asset Management. “For us, there aren’t any signs of a peak at this point in time.”
Then, there’s the question of Donald Trump’s tax cuts, which have given corporate earnings a timely boost. Stanes describes these reforms as a “sugar rush” for US businesses, but Johnston believes the benefits will be ongoing.
“What we are seeing is that the companies have increased their capital spending, which is a big deal because we hadn’t seen an increase in capital spending, especially on the industrial side, in a long time,” she adds.
Tax Cuts, Earnings and Buybacks
Meanwhile, Louise Dudley, portfolio manager on the Hermes Global Equity fund, notes, while tax cuts have clearly helped earnings across the pond, they are by no means the only tailwind.
Earnings per share growth in the US market is currently around 15%, with around half of that coming from tax cuts. “That’s a meaningful contribution, but there’s still a lot of other benefits and strong confidence out there.”
On valuations, Dudley says she’s been reassured by companies increasingly making use of cheap debt – while it’s still available as the Federal Reserve continues to nudge interest rates higher – to buyback shares. Goldman Sachs projects US buybacks will add up to more than $1 trillion in 2018, a record.
Of course, there are risks on the horizon. Geir Lode at Hermes notes a downturn could be on the cards should we see more inflation coming through, as well as faster-than-expected rate hikes.
While the latter looks unlikely currently, the former could be brought about by an escalation of trade tensions. “If you have increased tariffs and imports get more expensive, that might impact inflation numbers,” says Lode. As would any further pressure on wage growth, which continues to disappoint despite positive jobs figures.
Still, Johnston reckons the US-China trade spat is “creating more noise than any shift in the underlying fundamentals”. She adds: “And we are seeing both the US and China, especially China, doing whatever it takes to prevent a downturn.”
