Finance: Did The Stock Market Rise Too Fast & Too High?

 (Drivebycuriosity) - Last week the US stock market closed on a new all-time high. The S&P 500, the gauge for the US stock market, gained 17% year-to-date. Some skeptics complain that stocks rose too fast & too high. Really?

The charts below show that this year´s gain just compensated the meltdown from late 2018 (finance.yahoo). Since begin 2018 the S&P 500 gained just 7% - a very modest development, in the recent 24 months stocks climbed 22%. It looks like that the stock market found back to the upwards trend which started spring 2009, the begin of this bull market.


Last year the stock market responded to President Trump`s escalating trade war against China which is causing a lot damage to the global economy. In the recent weeks stock prices got spurred by news that China´s economy is re-accelerating (driveby), signs that Trump´s trade war against China is deescalating and an impressive start of the earnings season for the first quarter 2019. According to FactSet "46% of the companies in the S&P 500 have reported so far. 77% of them beat the analyst`s expectations for earnings per share (EPS), which is above the five-year average (factset). In aggregate, companies are reporting earnings that are 5.3% above the estimates, which is also above the five-year average" (factset).

I am convinced that the rally will continue, mainly for 4 reasons:

1. Company profits will proceed with their solid growth, the engine of the stock market gains. During the recessions of the years 2001/02 and in 2008 companies restructured and reduced costs significantly in order to survive. Now they are much fitter and more efficient than before. I believe that this learning process will continue and will translate into a long term trend of rising company profits.

2. We are experiencing a new industrial revolution.  Advances in Internet (cloud, 5G), mobile computing, 3-d-printing, robotics, nano- & biotechnology and other technologies are reducing costs, raising efficiency and creating new markets.

3. Lower taxes and less regulation in the US will also continue to support the growth of the company earnings.

4. There are solid tailwinds from the emerging markets which are even getting stronger. The catching-up process in China (which is still growing about 6% annually), India, Indonesia and a lot of other countries translates into high growth in large parts of the global economy ( wikipedia) that creates continuously rising revenues & profits for global companies like Starbucks, IBM, Caterpillar, Apple and other members of the S&P 500.


To be continued