Each week, we tap the insight of Sam Stovall, Chief Equity Strategist for S&P Capital IQ, for his perspective on the current market.
EQ: The latest comments from Fed Chairman Bernanke seemed to signal to the market that the eventual “taper” is still further down the road. Does this tone help to alleviate some of the pressure for equities investors?
Stovall: Yes, I think it does. The market pretty much yawned after reading the minutes of the Fed’s June meeting, but after the market closed and investors started listening to Chairman Bernanke’s comments during his press conference, we saw what can be described as delayed enthusiasm. Investors started to exhibit enthusiasm with the prospect of a delayed thinning of the tapering program.
In some ways, it doesn’t really sound all that logical because it’s almost like students being enthusiastic that school is going to start a month later. At some point, school may be going to start in October rather than September, but you are still going to have to make up the full year. My feeling is maybe investors are optimistic because it now could bring more months to improve confidence in the economy before the Fed starts its tapering programs.
EQ: The S&P 500 has bounced pretty strongly off the June lows from the recent pullback, and July has been quite kind for the bulls thus far. Do you see this upward trend continuing?
Stovall: For the immediate term yes, but for the near-term, I am a little bit more suspect. We have had several days of very strong price action and as of Thursday’s close, we have regained and surpassed all that we had lost to the pullback. The S&P 500 is back to all-time record territory once again, and a lot of the technical internal readings are showing that it’s a bit overbought in our opinion.
So while the market may go through a digestion in either time or price, we still will think that all the prospects look favorable, and there are still too many people that have likely been sitting on the side lines waiting for an even steeper correction and hoping for any chance to get back in.
EQ: Investors—and market timers, especially—tend to believe that what goes up must come down, and considering this first half’s sizable gains of 12.6 percent, they may be looking to take some profits off the table right now. According to your latest Sector Watch report, why could this end up being a bad idea?
Stovall: That’s correct, what I have found going back to World War II is that a positive price return for the S&P 500 in the first half of the year actually increased the likelihood of a gain in the second half. Since WWII, whenever the market fell the first half, it rose only an average 1.9 percent and gained in price 57 percent of the time.
However, when the S&P 500 rose in the first half, it gained an average of 5.4 percent in the second half and increased in price 74 percent of the time. Taking that one step further, if the first-half gain was larger than 10 percent, the market jumped an average of 7.5 percent in the second half and rose in price 76 percent of the time. So momentum tends to feed on itself. Of course, while history is a guide and not gospel, it at least intimates that we could continue to see positive action in the second half.
EQ: Second quarter earnings season has started, and it looks like S&P Capital IQ’s earnings estimates have been lowered a bit to 3.0 percent from the most recent 3.7 percent and the 6.9 percent from April. What were some of the reasons for that?
Stovall: You have companies that want to make sure that they meet or beat earnings expectations. So an awful lot of juggling goes on, if you will, before the actual start of the earnings-reporting period. A lot of analysts’ guidance is delivered by companies that help moderate the expectations. Right now, with only about 3-percent growth expected in the second quarter—and historically, actual numbers end up coming in anywhere from 4 percent to 5 percentage points higher than the estimates—it would imply, but not guarantee, that we could see an earnings increase anywhere from 7 percent to 8 percent in this second quarter rather than the original estimate of 3 percent.