MARKET SNAPSHOT: What Could Derail The Stock-market Rally? Watch Profit Margins
October 21 2017 - 7:24AM
Dow Jones News
By Anora M. Gaudiano, MarketWatch
Amazon, Alphabet to report results in a busy week for earnings
season
The U.S. stock market feels as though it is made out of Teflon,
with virtually nothing able to disrupt its climb to record
levels.
The broad S&P 500 index , which on Friday closed at a record
for the 49th time this year at 2,575.21, has sailed through 350
trading days without a 3% pullback, rising weeks and months on end
to a 15% gain since the start of the year.
According to Bespoke Investment Group, "2017 is tied for the
fifth most closing highs on record, dating back to 1929.
"Provided we don't see any major pullbacks, with two months left
in the year, there's the potential for more," they said.
Read:A problem for buy-the-dip investors: no dips to buy
(http://www.marketwatch.com/story/a-problem-for-buy-the-dip-investors-no-dips-to-buy-2017-08-08)
Maris Ogg, president at Tower Bridge Advisors, said given the
favorable economic background globally, the market could continue
to climb for another couple of years, let alone a couple of
months.
"We are seeing strikingly positive news coming out of Europe but
it's not yet an inflation-inducing growth, as there are still a lot
of unemployed people," Ogg said. "We are not likely to see
inflation until their labor market is tight, as there is still a
lot of slack."
Certainly, markets can get spooked by geopolitical events, but
recent history suggests it would take a major catastrophe to move
prices meaningfully.
See also:Retail investors see this as the 'best time ever' to
jump into stocks. Time to worry?
(http://www.marketwatch.com/story/retail-investors-see-this-as-the-best-time-ever-to-jump-into-stocks-time-to-worry-2017-10-18)
Another positive for the market is the lack of euphoria seen at
final stages of the bull market. Despite records and elevated
valuations, investor surveys show that high enthusiasm levels came
down over the past few months.
Stock-market bubbles tend to form when euphoric investors bid up
prices to unsustainable levels, as happened in late 1990s during
the tech boom.
According to Yale Professor and Nobel Laureate Robert Shiller's
weekly gauges of both retail and institutional investor sentiment
turned decidedly less bullish after peaking in July, as seen from
the chart below from Bespoke:
"We are getting more calls from our clients asking us whether
they should sell their stocks rather than buy them, because they
are scared. This is not what you normally see at market tops," Ogg
said.
So, if the outlook for earnings growth is positive given the
improving global economy, what risks are out there for stocks? Ogg
suggests the danger lurks in a sudden drop in profit margins.
According to FactSet, third-quarter net profit margin so far has
edged only slightly lower compared with profit margins in the third
quarter last year. On absolute terms, however, a net profit margin
at 9.5% is close to the record.
Historically, net profit margins tend to peak along with the
stock market, as seen in the chart below. Profit margins remain
stubbornly near their highs.
"We are seeing a modest uptick in hourly earnings, so wage
pressure is building up. Businesses are now faced with either
paying higher wages, replacing them with robots or outsourcing
where labor is cheaper. And businesses will figure this one out,"
Ogg said.
Over the short term, analysts say a potential correction trigger
could come in the event of disappointment in one of the so-called
FANG stocks: Facebook, Inc.(FB), Amazon.com Inc.(AMZN), Netflix
Inc.(NFLX) and Google parent Alphabet Inc. (GOOGL).
The coming week will be among the heaviest for earnings season,
with 189 S&P 500 companies and 12 of 30 Dow components
reporting quarterly results, according to FactSet. Both Amazon and
Alphabet are set to report, Apple's earnings are due on Nov. 2.
Investors should be paying close attention to those highflying
stocks, as outsize gains so far this year makes them vulnerable to
disappointments.
(END) Dow Jones Newswires
October 21, 2017 07:09 ET (11:09 GMT)
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