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  4. Earnings Growth Driving This Stock Market Rally

    First Quarter Earnings Growth Highest Since 2011

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    The S&P 500 is at record levels and the P/E ratio is the highest it’s been, since the market crash in 2008. However, as first quarter earnings begin to take shape, it looks like these lofty prices are valid. The chart below, courtesy of Bloomberg, says it all.

    First Quarter 2017 Earnings Growth

    Earnings growth is on fire. Not only have we pulled out of the earnings recession of 2015/2016, but growth is the best since 2011.

    The news is good looking forward too. Morgan Stanley says the number of companies revising their earnings outlook higher, rather then lower, is the highest since 2012.

    According to Dow Jones S&P, the 2017 forward P/E is 18.55. This would give an annual growth rate of 12.47% and a 1.49 PEG.

    Growth Sectors Growing

    The news was particularly rosy for the sectors that do well in a growing economy. The financials had the highest growth rate, followed by materials and information technology.  The fact that these companies are leading the charge, makes me believe that we are in an earnings driven rally, that will keep going for some time.  There were also several brick and mortar retailers that posted some positive earning surprises last week.

    Macro Economy A Mixed Bag

    The most recent industrial production and retail sales numbers surpassed estimates. While inventories were lower and  there were some rather cool housing numbers last week. Durable goods orders were also down last month.

    The most disconcerting macro event has to be the recent flattening of the yield curve. The twos tens spread narrowed even more on Friday. This could cut into financials earnings, if it continues. 

    Next week, there are numbers on personal income, spending and the jobs report on Friday, which should show wages are rising. If we continue to get wage gains, the economy should bounce back in the second quarter and bring a steepening yield curve with it.

    Correction Coming?

    Considering we are in the midst of an eight year bull market, with the S&P 500 at an all time high, I would be remiss not to mention the possibility of a correction. The VIX is hovering near ten and there has not been a market correction (a move down of 10%), since February of last year. A five year chart of the S&P 500 looks very ominous.

    S&P 500 Chart

    However, as I have pointed out, earnings continue to grow. In my opinion, the market will go higher. Balance the risks of not being invested in a rising market, with waiting for a correction. I say buy this market now.

    I continue to like the financials. They have the most to gain from what looks to be an economy that is slowly turning and rising earnings.

    I think the recent flattening of the yield curve is an aberration. The market is reacting to a lot of the political scandals that are being floated by the media. There is less confidence the Republicans will be able to get tax cuts and deregulation done.

    Look for the market to concentrate on the numbers this week. Especially the jobs number on Friday. They should show the economy is slowly turning. Hopefully, with a stronger economy, Congress can begin getting through fiscal and banking reforms too.

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