All major U.S. equity markets are currently at or near their highs. Mike Gibbs, Managing Director of Equity Portfolio & Technical Strategy, weighs in.
The S&P 500 was able to break out to new all-time highs in August due to a strong second quarter earnings season, good economic data, and positive developments on the trade front. Over the course of a month, the U.S. announced initial trade agreements with both the EU and now Mexico. Up next is a targeted deadline (Labor Day weekend) to finalize negotiations with Canada; however, there is significant work to be done in order to meet the accelerated timeline.
Related to China, we saw more optimism for a positive resolution following the announcement that President Trump and President Xi are set to meet on November 18 at the Asia-Pacific Economic Forum. This is seen as advancement from the current low-level talks between the two nations. However, tariffs on $200 billion worth of Chinese goods are set to be imposed as early as September. These, along with additional other headlines, could quickly turn sentiment cautious.
While there have been positive trade developments, there are still a lot of unknowns that could create volatility over the next several weeks as we enter the seasonally weakest period of the calendar (September through October). Fundamentals are strong, but we believe unbridled enthusiasm is not justified. We continue to recommend selectivity for favored sectors, subsectors, and stocks as they pull back to support levels.
On the earnings front, second quarter earnings season is coming to a close. Earnings growth for the quarter is set to finish at 24.9% on sales growth of 10.0%. Other than the 25.7% earnings growth in the prior quarter, this is the strongest earnings growth since the third quarter of 2010. Estimates for the full year remain in the strongest trend since the credit crisis and currently reflect earnings growth of 21.8% on sales growth of 8.4%.
On the technical side, broad strength supports continued momentum in the equity markets. All major U.S. equity markets are at or near their highs. The small caps have broken out to new all-time highs on both an absolute and relative basis, and the Nasdaq Composite and S&P 500 Transports have both broken out on an absolute basis. Also, the S&P 500 equal weight index is close to new absolute highs; however, it continues to exhibit disappointing relative strength trends, contributing to our stance on being selective. For pullbacks, there are plenty of nearby support levels for the S&P 500, including 2873 (January high), 2836 (30-day moving average) and 2803 (50-day moving average).