By Sue Chang, MarketWatch
Strategist: If S&P 500 continues at current pace, annualized
return could hit 193%
The stock market's stupendous start to the new year could get
even more interesting as the corporate earnings season kicks off in
earnest next week.
There are high hopes for fourth-quarter results.
Strategists at Bank of America Merrill Lynch project
double-digit quarterly earnings-per-share growth to $35.07 for the
S&P 500.
"Strong guidance, a healthy global economy and higher oil prices
support a pickup in growth, and record U.S. data surprises along
with record results from the early reporters suggest to us a beat
is likely," said Savita Subramanian, an equity and quant strategist
at Bank of America Merrill Lynch, in a report.
John Butters, senior earnings analyst at FactSet, projected
S&P 500 companies will report a fourth-quarter earnings rise of
10.2%, the second-strongest since 2011, based on the consensus
forecasts of analysts. However, the actual pace of earnings
increase may be closer to 14%, he said, given the large number that
are turning in results above estimates.
Butters also predicted that all 11 S&P 500 sectors will post
both earnings and revenue growth in the fourth quarter, something
that has not happened since the third quarter of 2011.
Even more important than the parade of numbers may be what the
management has to say about the tax reform, strategists
stressed.
This view was borne out during JPMorgan Chase's(JPM) conference
call early Friday where much of the time was devoted to fielding
queries on how the tax cuts will affect the bank's balance sheet
going forward.
Read:Bank earnings started off 'mixed' and 'messy' -- and that's
likely to continue
(http://www.marketwatch.com/story/bank-earnings-started-off-mixed-and-messy-and-thats-likely-to-continue-2018-01-12)
In December, President Donald Trump signed into law a $1.5
trillion tax package that has been billed as the most comprehensive
overhaul in three decades. The new regulation slashes the corporate
tax rate to 21%, temporarily lowers individual rates and eliminates
Obamacare's individual insurance mandate, among other changes.
The euphoria over tax cuts and a rosy outlook on the economy
have continued to fuel a strong rally in stocks, with major indexes
setting records almost every day of the new year
(http://www.marketwatch.com/story/fresh-records-in-sight-for-us-stocks-as-earnings-inflation-data-loom-2018-01-12).
Indeed, based on the first two weeks of the year, analysts are
observing that 2018 may be a doppelgänger for 2017.
"It looks a lot like 2017 to this point," Andrew Adams, market
strategist at Raymond James, wrote in a recent note. "So much for
the idea that investors would welcome the new year by taking
profits to finally realize capital gains, an idea that I thought
may have some merit to it; investors still see no reason to sell
their stocks and we can't really blame them."
Adams said a pullback could emerge at any time given that the
S&P 500 is the most overbought in 38 years based on the
relative strength index. Even so, there is nothing, he said, that
suggests that a major selloff is in the offing.
The first two weeks of 2018 has been overloaded with
records.
The Dow Jones Industrial Average has climbed 4.4% and the
S&P 500 has rallied 4.2% through Friday for their best start to
a year since the first nine days of 2003. And the Nasdaq jumped
5.2%, the best since 2004, according to the Dow Jones Data
Group.
In fact, if the market continues to gain at its current speed,
annualized return for the S&P 500 could jump as much as 193% in
2018, according to Frank Cappelleri, a technical strategist at
Instinet LLC.
To be clear, the point of that outlandish figure isn't that
Cappelleri expects that sort of outperformance but as a warning of
things to come.
"If we see the advances continue to accelerate like we saw last
week, it would indicate that more emotion is being pulled into the
trading environment. And emotion and volatility rarely exist on one
side of the market. If that happens, it would set up the market for
a more material decline," he said.
The companies reporting quarterly results during the week
include 28 S&P 500 companies, among them four Dow components.
On the list are including Citigroup Inc. (C), Bank of America Corp.
(BAC), Goldman Sachs Group Inc. (GS), UnitedHealth Group Inc.
(UNH), Morgan Stanley (MS), American Express Co. (AXP) and
International Business Machines Corp. (IBM).
On Friday, the Dow gained 228.46 points, or 0.9%, to close at
25,803.19 while the S&P 500 rose 18.68 points, or 0.7%, to
2,786.24. The tech-heavy Nasdaq added 49.28 points, or 0.7%, to
7,261.06.
Read:5 stocks to capitalize on the records being set by the Dow
Jones Transportation Index
(http://www.marketwatch.com/story/these-5-transport-stocks-are-winning-plays-on-an-upbeat-economy-2018-01-12)
(END) Dow Jones Newswires
January 13, 2018 11:44 ET (16:44 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.