Monday, 11 July 2016

S&P 500 approaches record high but faces earnings test

After a strong rebound that has taken it back to its all-time high, the US stock market faces challenges in maintaining the rally.

The S&P 500 rose 1.3 percent last week to 2,129.9, just 0.2 percent below the 2,134.72 high reached in May 2015, after briefly trading above the latter on Friday.

In the process, the S&P 500 has erased the losses suffered following the referendum in the UK where voters chose to leave the European Union.

Patti Domm at CNBC wrote that stocks “could easily break out to new highs in the week ahead, as earnings become the next test for the market”.

“I think we're going to go higher over the next few months. I think we're going to go to 2,200. We're going to have a breakout in optimism,” said James Paulsen, chief investment strategist at Wells Capital Management. “I think economic momentum is returning.”

Wharton professor of finance Jeremy Siegel thinks so too. “If we get a good second half of the year earnings-wise, then I think the market could be up 10 to 15 percent,” Siegel told CNBC on Friday.

That optimism is not shared by Matt Kadnar at GMO. Kadnar told Brett Arends at MarketWatch that the overall investment outlook is dismal. “There is no asset out there that is cheap,” said Kadnar.

And investors may not be as optimistic as the advance in the S&P 500 would suggest. CNBC noted that the recent rally in the S&P 500 has been driven by defensive sectors such as utilities, telecom and consumer staples.

“That could be a precursor to an economic slowdown,” it suggested.

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