U.S. stocks are rallying at the fastest pace in almost two years after Congress resolved the budget standoff and investors shifted their focus to Federal Reserve stimulus and forecasts for record corporate profits.
While declining revenue dragged down shares of International Business Machines Corp. (IBM:US) and Goldman Sachs Group Inc. yesterday, investors have reasons to be optimistic heading into a time of year that has generated twice the return for stocks than other periods. The Standard & Poor’s 500 Index (SPX) is up 4.7 percent in the past seven days, the most since December 2011, rebounding from losses spurred by concern the U.S. was approaching a default.
With the debate over the budget and debt ceiling probably over for this year, investor attention will turn to earnings and the Fed’s schedule for tapering economic stimulus. Equities climbed back to all-time highs yesterday and more than 260 companies in the S&P 500 are set to report quarterly results in the next two weeks, the busiest time of earnings season.
“Everyone’s been paralyzed the past few weeks and today we finally flipped,” Ken Bollinger, a technology trader for almost two decades, said in an interview at the Raymond James Financial Inc. office in New York. “The focus is back to earnings. Tapering is on the back burner, so there’s still easy money around. That’s good for stocks.”
BlackRock Inc. and Pacific Investment Management Co. say the Fed will postpone reducing its bond purchases as a result of the debt-ceiling debate. Central bankers must assess how the government shutdown affected the economy, according to Mohamed El-Erian, the chief executive officer at Pimco, which runs the world’s biggest bond fund in Newport Beach, California.
The S&P 500 rose 0.7 percent to 1,733.15 yesterday, surpassing the previous record of 1,725.52 from Sept. 18. The Chicago Board Options Exchange Volatility Index (VIX), a measure of options prices for U.S. stocks, fell 8.4 percent to 13.48 to cap the biggest two-day decline since January.
Gains in the S&P 500 have averaged 1.1 percent in the first four weeks of earnings seasons since 2003, according to data compiled by Bloomberg. That’s about twice the usual four-week gain in the index.
American Express Co. (AXP:US), the credit-card lender, had the biggest rally in almost two years yesterday after reporting third-quarter profit that beat analysts’ estimates. McDonald’s Corp., Halliburton Co. and Texas Instruments Inc. are among S&P 500 companies scheduled to give results next week, data compiled by Bloomberg show.
“Investors have to get back into a different mindset and take off their political science-major hat, and put on their finance-major hat again,” John Buckingham, chief investment officer at Al Frank Asset Management Inc., said in a phone interview from Aliso Viejo, California. His firm oversees $4.5 billion. “I’m optimistic about stocks in general because I think valuations are reasonable.”
While U.S. equities are the most expensive in three years relative to earnings, Robert J. Shiller, a co-winner of this year’s Nobel Prize in economics, recommended buying shares instead of other assets. The S&P 500 trades at 16.7 times reported operating profit, an 18 percent increase from the beginning of 2013, according to data compiled by Bloomberg.
“The U.S. market is still not that overpriced, not like it was in 2000,” Shiller, an economics professor at Yale University in New Haven, Connecticut, said in a Bloomberg Television interview with Tom Keene and Sara Eisen on Oct. 15. “Looking at the alternatives, it should be a part of your portfolio.”
While the rate of profit growth is slowing in the S&P 500, companies in the index have reported record annual earnings for more than two years, holding valuations close to the historical average even as the gauge’s price reached an all-time high in March and kept climbing.
Profits for companies in the S&P 500 probably increased 1.4 percent during the third quarter as sales rose 2 percent, according to analysts’ estimates compiled by Bloomberg. Among the 87 companies in the index that have reported so far, 72 percent exceeded analysts’ estimates, about the same proportion as the previous quarter.
S&P 500 companies are projected to earn a record $107.90 a share this year, up from $45.82 a share in 2009, according to data compiled by Bloomberg. Among the 20 biggest companies that released results, the median one-day stock move afterward has been a gain of 1.2 percent.
Weakening profit growth will limit stock gains, according to Donald Selkin, who helps manage about $3 billion as the New York-based chief market strategist at National Securities Corp. The shutdown has shaved at least 0.6 percent off of fourth-quarter 2013 gross domestic product growth, taking $24 billion out of the economy, S&P Ratings Services said this week.
“Earnings are not going to be so great,” Selkin said by phone. “Companies are uncertain about the effect on growth from the shutdown, they may not have gotten the contracts they expected and they will generally be thrown off by this political situation.”
IBM sank 6.4 percent yesterday, the most since April, after posting its sixth consecutive drop in quarterly sales. Goldman Sachs (GS:US) dropped 2.4 percent after revenue dropped the most among the biggest Wall Street banks and fixed-income results were the worst since the financial crisis.
The S&P 500 climbed 156 percent in the last four and a half years. The rally has outlasted the average length of bull markets since World War II, according to data compiled by Bloomberg and Birinyi Associates Inc.
While stocks with the biggest gains may be vulnerable to declines during the fourth quarter, the overall rally will continue, said Terry Sandven, the Minneapolis-based chief equity strategist at U.S. Bank Wealth Management. This S&P 500 advance this year is the broadest since at least 1990, with 451 stocks in the gauge posting year-to-date gains, data compiled by Bloomberg show.
It’s been a comparatively calm October for financial markets. Daily swings in the S&P 500 have averaged 0.8 percent, down from 0.9 percent for Octobers over the last eight decades and less than a quarter the moves in 1929, 1987 and 2008, the data show.
“I’m continually amazed at how resilient our broad equity market has been,” Sandven said in an Oct. 16 phone interview. He helps oversee $112 billion. “We’ve gone through the fiscal cliff, sequestration, preliminary debt ceiling discussions, tapering and the like, yet we’re still flirting with all-time highs.”
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