Stock Market: Did The Summer Rally Already Start?

(Drivebycuriosity) - It seems that the usual summer rally on the stock market had already started. Last week the S&P 500, the gauge for the US stock market, gained 1.5%, about the same as in the first half of 2018 (plus 2%).

In the first half of the year stocks had been hold back by rising interest rates, climbing oil prices (which fueled inflation) and Trump`s trade war. But these negative impulses are now priced into stock aluations. In the first half Wall Street neglected the strong company earnings and ignored that US Companies had a stellar earnings season. In the first quarter of 2018 earnings for the big US companies, which are represented in the SP 500, grew about 25% from the same period last year - and 78% beat the  earnings estimates of the analysts (nasdaq). Stocks rose much less than earnings (plus 14%) so they have been getting cheaper in the recent months (falling P/E ratios).

Just a part of the earnings growth is the result of the recent tax cuts of the Trump administration, about 7 percentage points estimates LPL research. Even without tax cuts earnings grew about 18% (basic earnings growth rate). Company earnings are fueled by the global economy which is growing about 4%. But the earnings growth is also a long term trend. Corporations are getting more efficient & more productive over time - thanks to learning processes and the technological progress. They are learning organisms because they are managed by humans who are continuously improving themselves and their companies. During the recession 2008 companies had restructured and reduced costs significantly in order to survive. Now they are more fit & more efficient than before.

Company earnings are also boosted by automation.  Since the early 18th century (the first industrial revolution) the technological process has been enabling companies to produce more goods & services with the same amount of employees. More and better machines are doing the work of people which translates into lower costs, higher profit margins and climbing earnings.

It seems that this process is accelerating again and we are at the begin of new industrial revolution. We are experiencing a rapid advance of information technology, meaning combinations of computers, smartphones, Internet and other digital systems. Software - which is increasingly Internet connected and uses more and more the cloud (access to huge external data centers) - organizes the whole business: Creating new products, inducing machines to run more efficient, finding cheap suppliers, manage customer relations and so on. Car producers and many other manufacturers are increasingly using robots and similar machines to reduce their costs. Companies are also beginning to use 3D-printers to become more cost efficient and flexible-

We are now at the begin of a new earnings season and companies will report about Q2 in the coming weeks. I think that the strong earnings growth from Q1 will continue and may even accelerate. There is a high change that the earning growth will lift sentiment in the coming weeks and will overcompensate the headwinds from interest rates, trade war & oil prices. Welcome to the summer rally.