Five reasons to Like Stocks

Focus: STRATEGIES

John Boyd Image John Boyd Editor, Fidelity Monitor & Insight

The list of worries for stocks is long indeed: the North Korean nuclear threat, Marine Le Pen in France, weak first-quarter GDP, concerns of overvaluation, fear of higher interest rates, little or no progress on President Trump’s pro-business agenda, and on it goes, asserts John Boyd, editor of Fidelity Monitor & Insight.

Yet the stock market has continued to climb this “wall of worry” in classic bull market fashion. And there are several reasons why we believe this old bull has more room to run.

Interest Rates Remain Historically Low

Inflation is muted and the Fed is likely to stay cautious. While we could see two more 25 basis point hikes later this year, that would only bring short-term rates (Fed Funds rate) up to 1.25%-1.50% — well below their 4-5% range prior to the financial crisis.

Our long-term rates, while also historically low, are still among the highest in the developed world, attracting strong foreign demand. Combine that with a lack of inflationary pressures, and long-term rates should not spike higher, either.

Earnings Are Strong

With about 30% of the S&P 500 reporting, first quarter earnings came in at 1% above estimates, the highest in five years according to Savita Subramanian of Bank of America Merrill Lynch (and they have continued to surprise to the upside).

Moreover, managements’ positive tone on earnings calls has been notable with the word “better” versus “weak” or “weaker” at levels not seen since 2010. Earnings per share (helped by buybacks) jumped 21% in last year’s fourth quarter and are on track for similar gains in this year’s first quarter.

Few “Believe” In This Market Advance

In a recent survey, 83% of fund managers thought domestic stocks were too expensive and individual investors are mostly dour as well.

 
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