Look beyond near-term uncertainty for why stocks should continue to do wellSubmitted by LWM | Linden Wealth Management LLC on September 11th, 2018
September has historically been one of the worst months for stocks, but fundamentals and other factors should provide further long-term support.
As Dr. Edward Yardeni shows, September has been the worst month for the S&P 500 down -1%. This, coupled with midterm elections, trade, and rising rates are a drag on the market:
But, if you look beyond these issues, you'll see several forces likely to drive stocks higher:
1. Fundamentals: Economic growth and strong earnings
Equity market performance is always tied to macroeconomic growth. While growth has shown signs of slowing overseas, it remains robust in the US. In the second quarter, US real growth surged by 4%.
The strong economy is supporting corporate revenues and earnings. The growth we're experiencing exceeds the mere effects of tax reform.
2. Technical support: The buyback boost
Over the last decade, net share repurchases by US companies have nearly tripled, to an expected $650 billion in 2018. US companies have been incentivized to reward investors with buybacks, which are more tax efficient than dividends. What's particularly interesting, these record buybacks are occurring when the markets and valuations are higher not lower as traditionally seen.
It is estimated that US companies have $3.5 trillion in overseas cash. Much of which will find its way back to the US for further stock repurchases.
3. Valuations: Concerns have eased
These benefits have been overshadowed by concerns about US equity valuations. But, the S&P 500's price to forward earnings has fallen back to its 20-year median. The market correction in the first quarter of 2018 compressed the P/E from 19x to 16.7x. The most attractive level in three years.
While US stock valuations are higher than most other global markets, analysts believe the premium is justified. US equities have delivered the best risk-adjusted returns compared with other markets since the global financial crisis. Of course, there are plenty of risks today, but US stocks have enough staying power to defy the skeptics and deliver solid future returns.
(Important contributions to this article from A|B research insights)
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