With The S&P 500 Up 7.2% In 3Q18, What's Driving Stocks?
As the third quarter of 2018 closed, the Standard Poor's 500 stock index — a barometer of the U.S. economy — closed the quarter at 2913.98 on Friday, as the unusually strong and long economic expansion powered stock prices to within 1% of its recently reached record high.
The S&P 500 rose 7.2% last quarter. It was the best quarter since the end of 2013, and the index was up about 9% since the start of the year.
Amid abnormal political polarization in the U.S., a crisis of trust in internet security, and nationalism rising worldwide while globalism was under attack, the bull market and economic boom recently turned nine years-old — the longest in U.S. history — raising worries about risk. What's driving stocks?
Earnings are driving stocks! This chart shows that the S&P 500 index experienced an unusual surge in profit expectations in the first eight months of 2018.
Earnings estimates by Wall Street analysts for the S&P 500 for each calendar fiscal year since 2011 started overly optimistic and then were shaved as the end of the years approached. That's the typical pattern. From 2012 through 2017, six consecutive years, earnings expectations were lowered substantially compared to when the year started.
However, the pattern for 2018 and 2019 is different. Since the signing of the Tax Cuts and Jobs Act on December 22, 2017, analysts have not lowered their expectations for 2018 and 2019 profits for America's largest 500 publicly held companies. To the contrary, earnings estimates surged!
Moreover, the initial earnings boost in January, February and March was expected, as analysts factored in the tax savings into their forecasts. However, the higher earnings forecasts continued beyond the one-time upward revision from the tax law, accelerating in April and through August 2018. This was an unexpected surprise.
Sales revenue estimates are generally subject to the same pattern as profit estimates. Revenue predictions by Wall Street's analysts normally are shaved as the end of each year closes in. In 2018 and 2019, estimates of sales expected at the S&P 500 accelerated, breaking their normal trend.
Accelerating sales estimates are not driven by taxes or corporate accounting. Sales are driven by consumers. So, the recent acceleration in expected revenue is a sign of unexpected consumer strength — a key fundamental to U.S. growth.
This article was written by a veteran financial journalist. While the sources are believed to be reliable, the information is not intended to be used as financial advice without consulting a professional about your personal situation.
- Amid A Swirl Of Controversy, Fed Policy Remained Stable
- More Good Economic News On Friday
- Is Amazon Keeping The Inflation Rate Low?
- Analyzing The Market Correction
- This Week In Stocks And The Economy
- Analyzing The Risk Of Stocks After The 6.9% Drop
- Fed Chair: "We Remain In Extraordinary Times."
- With The S&P 500 Up 7.2% In 3Q18, What's Driving Stocks?
- Widespread Misinformation Follows Household Median Income Report
- Investment Wisdom At A Poignant Moment In History
- Good Economic Surprises Happening Now
- Economic Facts To Prepare For The Elections
- Another Member Of Music Royalty Dies With No Will
- Top 10 Indications The Economic Outlook Is Brighter Than Expected
- Wealth And Economic News This Week (2-Minute Read)
- 10 Things: New Education Tax Breaks For A Child Or Grandchild
- The Truth About U.S. GDP Growth
- Despite Distractions, Economic Data Boomed Last Week
- Protect Yourself Against Spearphishing
- Even The New York Times Gets Investment Facts Wrong Sometimes
- First-Half Of 2018 Stock Investing Highlights
- U.S. Leading Indicators Growth Rate Slowed In May; Should You Worry?
- Signal To Noise Ratio Of U.S. Economy Is An Anomaly
- Father's Day Financial Tip: Put Your Kids To Work