After rallying over 5% in January and then seeing a 11% peak-to-trough drop in February, the S&P 500 has seen quiet price action over the last three months. In fact, the index has spent the last 16 weeks contained to the range from just the first two weeks of February alone.
The recent consolidative price action reflects traders’ uncertainty as they weigh the bullish near-term fundamental catalysts against stretched long-term valuations. Tackling the short-term first, the Q1 earnings season was one for the record books for companies in the S&P 500. In aggregate, the index saw its earnings grow 25% in the first quarter, the highest growth rate since 2010 (though of course, much of this move was due to December’s large corporate tax cut and was discounted by the big rally through Q4 of last year and January). According to the earnings mavens at FactSet, nearly 80% of companies reported earnings above their mean estimate, the highest proportion on record.
Looking ahead, the strong earnings growth trend is expected to continue into Q2, with FactSet estimating an earnings growth rate of 18.9%. That said, investors have already taken that potential into account, so a merely “as expected” quarter is unlikely to provide fresh juice to US stocks. Furthermore, the market will be keeping a wary eye on the brewing trade war, as well as geopolitical tensions throughout the world. As a final headwind, US stocks are trading at elevated long-term valuations; though measures such as CAPE (the cyclically adjusted price-to-earnings ratio) are not effective timing tools, they do suggest that stocks may struggle to continue their long-term rallies at a certain point.
From a near-term technical perspective, the situation is looking increasing optimistic for S&P 500 bulls. The index has broken out of its 3-month symmetrical triangle pattern, and after retesting it from the topside last week, prices are trading up to an 11-week high this morning.
If bulls are able to maintain the upper hand in the coming days, the index could look to target the March highs near 2800; above that level, the record highs near 2875 may come quickly into play. On the other hand, a reversal to break below last week’s low would create a “false breakout” on the daily chart and open the door for a drop toward major year-to-date support in the 2575-2600 area.
Source: Trading View, FOREX.com