Bulls vs. Bears
Right now, there’s a big debate going on between the bulls and the bears. Some people believe the market can continue to be strong while others believe that we’re going to see the market turn down. There are no guarantees, but at this point the Fed is undefeated. Based on research we’ve done, and the information provided in this vlog, this market still may have upside to it. Some people have said that it’s been great that the S&P 500 has rallied but have pointed out that it’s been led by so few stocks. Some of the underlying stocks of the S&P 500 have not followed with the same strength as others. However, at the same time, earnings and jobs have played a role in the strength of this market.
If the Fed wants interest rates to move or if they want to stop the market from moving, they can and have proven this time and time again. Where the uncertainty comes in, is we don’t know when the Fed will not want the stock market to move higher or when they will allow interest rates to move higher. Those things are being pushed by their stimulus efforts. Two big data points that we’ve been watching since the beginning of this turnaround in the market, have been Fed stimulus versus market strength and earnings in the economy. It’s a race against time, to a certain degree, of when earnings catch up to where the market is priced to justify the current price to earnings ratio versus when the Fed stops pumping money into the system and pushing prices higher. Can earnings catch up to current market levels based on Fed stimulus before the Fed stops providing that stimulus? Last week, 35% of the S&P 500 companies reported their earnings. That makes 296 total of out the 500 largest publicly traded companies in the US that have reported earnings. The earnings and revenue numbers have been fantastic and are something very important for us to watch to see if earnings are catching up with the price level. Looking at the total market, the 500 largest companies that make up the S&P 500 are expected to earn around $200 a share this year. With the market trading at around 4,400, that gives us a good price-to-earnings ratio. It is currently $30 higher than where expectations started this year. How do you conceptualize $30? If you put a 20 multiple on $30 worth of earnings, that is $600 worth of price movements. So, with the S&P 500 trading around 4,400 and earnings $30 higher, you can justify a price of $5,000 for the S&P 500. We are not saying that’s going to happen, but that’s how earnings can push the valuation of the market. We really need to see earnings move higher to justify current prices.
Looking into The Future
When will the Fed stop stimulating the stock market and the bond market? The Fed is continuing to buy $120 billion worth of bonds a month. The Fed is watching the jobs number because we are still around 7 million jobs short of where we were before the pandemic. On Friday, we will get the July jobs number. The expectations are for the report to show that around a million new jobs were created in the month of July. Will we exceed that number, or will we be disappointed? Also, how will the Fed react? You may see a disappointing number on Friday and the market shoot up. We’re watching earnings this week, which is looking into the past. Looking forward, we are looking to see who’s winning the race and where the jobs numbers are because that may dictate how quickly the Fed pulls back on stimulus. The Fed has this flexibility to participate in the market in a variety of ways and they are determined to use jobs as a key indicator. It’s been a long time since we’ve had a Fed chairman and a Fed board that has been pro-jobs oriented like we’re seeing now. Another concern we may see going into 2022 or later this year, is the chairman will be up for reappointment. That is uncertainty but as things stand now, we know the Fed, we know their policy, and we know our market. Now, we just need to look to the future, a little bit.
Greg Powell, CIMA®
President and CEO
Email Greg Powell here
Trey Booth, CFA®, AIF®
Senior Vice President
Email Trey Booth here
Fi Plan Partners is an independent investment firm in Birmingham, AL, serving clients across the nation through financial planning, wealth management and business consulting. Fi Plan Partners creates strategies in the best interest of their clients using both fee based investing and transactional investing.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
Economic forecasts set forth in this presentation may not develop as predicted.
No strategy can ensure success or protect against a loss.
Stock investing involves risk including potential loss of principal.
Securities and advisory services offered through LPL Financial, Member FINRA/SIPC and a registered investment advisor.
Podcast: Play in new window | Download