May’s stock market advance was driven by the same factor we have been emphasizing for months: exceptional corporate earnings growth. With first quarter results essentially complete, companies in the S&P 500 grew earnings by 28.2% over the same period last year. This extraordinary result is the fastest growth in 5 years and far exceeds expectations going into the quarter (all data according to Factset).
Importantly, despite new all-time highs, the market is cheaper today than it has been over much of the past year. Price increases have not kept pace with corporate earnings growth; investors are paying less per dollar of earnings than they have been for most of the last year. In other words, current market levels are well supported by fundamentals.
Predicting market tops or upcoming declines in a long-term bull market is rarely profitable. But investors should not expect a straight line higher. We have written about the historical tendencies for pullbacks in midterm election years and after confirmation of a new Fed chair. Additionally, several mathematical measures suggest the potential for a pullback, particularly in technology. It would not be surprising to see a market decline in the coming months, and investors should be mentally prepared for that possibility. However, we would expect any pullback to be relatively minor, temporary, and not disrupt the long-term positive outlook.
The upcoming IPO of SpaceX has captured the attention of the media and the public. Generally, when the investing public is excited about something, it is right to be on the other side. Running the numbers based on reported revenues and earnings, the proposed valuation for SpaceX appears extreme, even after accounting for a significant “Elon Musk Premium”. Much optimism and growth potential is already priced in. Others have written that the SpaceX IPO (and other rumored large IPOs) are a threat to the market and may represent a significant top. We disagree with that assessment as well. While we think these IPOs may have a small net negative effect on the market, we think the positive factors we have focused on before (demographics, earnings growth, technological innovation, confirming from objective indicators of market health) should continue to power the market higher over time.
Investing is a battle between fear and greed. Fear dominated the conversation earlier this year around the Iran war. Trillion-dollar IPO valuations and grandiose visions of commercializing space are likely to bring greed back to the forefront. Our process seeks to strip out these emotions and focus on objective indicators. That enabled us to stay positive during the war-induced pullback in February and March. Today our process suggests we should not chase the “shiny object” IPOs or become overly greedy. We will continue to follow our data-backed process to navigate the markets going forward.
This is being provided solely for informational and illustrative purposes, is not an offer to sell or a solicitation of an offer to buy any securities. The factual information given herein is taken from sources that we believe to be reliable but is not guaranteed as to accuracy or completeness. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation or needs of individual investors. Employees of Janney Montgomery Scott LLC or its affiliates may, at times, release written or oral commentary, technical analysis or trading strategies that differ from the opinions expressed here.
