Stock Market: Happy Second Half 2018

(Drivebycuriosity) - Yesterday the US stock market started the second half of 2018 with a gain. I think this is a good omen and the second half of 2018 will be better than the first half. In the first six months of the year the SP500, the gauge for the stock market, almost stagnated (just plus 2%). Rising interest rates, climbing oil prices & Trump`s trade war had spoiled the sentiment.

I think that these negative influences are now already priced into stocks and history shows that stock prices & interest rates can happily rise together: The Bank of America Merrill Lynch (finance) notices that “the 1950s was a period of higher stock prices and higher US interest rates. The US 10-year yield bottomed near 1.5% in late 1945 and the S&P 500 remained firmly within its secular bull market until yields moved to 5-6% in the mid 1960s. The S&P 500 rallied 460% over this period.”
 
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). As a result stocks got cheaper (falling P/E ratios).

I think that the strong earnings growth will continue and will overcompensate the headwinds from interest rates, trade war & oil prices. 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).

I assume that company earnings will continue to grow with double-digit rates because fast rising company earnings are 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.

I assume that the new earnings season (company reports from Q2), which will start next week, will again a lot positive surprises which should lift the sentiment and so restart the stock market rally.