June often marks a mid-year lull in the stock market, but with no hiatus yet, the stock market continues the rally that began when President Trump took office in November. As we head into the second-quarter earnings season, analysts are hoping to see results that will justify current stock valuations, which are trading at their highest point since 2004. We are now in the ninth year of a bull run, which has been fueled in recent months by investors who believed that President Trump’s policies would fuel continued growth. Because the healthcare reform and the other major Trump promises have not yet materialized, some investment professionals are wondering how long the major stock indices will be able to sustain their current highs. Here’s an overview of key issues and points of discussion.
- Oil Prices are a major focus for many investment advisors. U.S. crude oil futures have been forced lower by a supply glut. Many of the expectations for an upswing in earnings rely on oil prices remaining above $47 per barrel. By the third week of June, prices had slipped from averaging $48 per barrel for the quarter to $43 per barrel. Since oil prices hit an 18-month high in February, they have been trending lower and are now down some 20 percent off the highs.
- Sectors expected to benefit from Trump’s proposed policies have underperformed in the market recently. Analysts have noted that specific companies and sectors that were expected to be buoyed by his policies post-election have failed to deliver. Expectations that Trump would be able to work with a Republican-majority House and Senate to pass a variety of bills designed to boost corporate profits and generate growth have not been met. Sectors affected by Trump’s difficulties in getting bills passed include:
- The financial sector, which initially was a big beneficiary of post-election euphoria, but is currently lagging. It could meet earlier expectations if a bill to roll back Dodd-Frank becomes law.
- The coal industry was expected to rally following Trump’s withdrawal from the Paris climate accord, and it did, but it lags in comparison with the market in general.
- Interestingly, analysts note that the initial post-election reactions in the market to the President’s stance on trade and immigration with Mexico have completely reversed themselves. Significantly, the largest exchange-traded fund tracking the Mexican equity market initially plummeted when Trump won the presidency, but now has rebounded and is up an astounding 23 percent (more than double the 9.4 percent rise recorded by the Standard and Poor’s 500).
- In general, earning expectations have dropped for 10 of the 11 industry groups since April – industrials are the only sector looking better than they did two months ago.
- Technology earnings are expected to post double-digit growth. Healthcare, despite the President’s difficulties in repealing the Affordable Care Act, is up nearly 14 percent for the year, second only to tech stocks among sector gainers.
The bottom line is that the oil price slump and the prospect of declining earnings are capturing market experts’ attention. With indices approaching record highs, experts are wondering if a market correction is just around the corner.
The above is general commentary and is not intended to replace professional advice from your tax and investment advisors.