S&P 500 hits record high as earnings eclipse trade war fears

Adam Shell | USA TODAY

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Wall Street got fresh proof that stock market bull markets don’t die of old age.

The Standard & Poor’s 500 stock index, a broad gauge of the U.S. stock market, hit a fresh all-time high Tuesday, topping its prior January 26 peak of 2872.87. Stocks have been in recovery mode ever since the early-year price run-up gave way to a major bout of market turbulence that pushed the market down more than 10% from a high for the first time in two years.

The latest record extends a period of rising stock prices that began more than nine years ago and which puts the large-company stock index on track Wednesday to eclipse the 1990's bull market as the longest in history at 3,453 days.

It’s not uncommon for investors to fear a market top the longer a stock market advance extends. But, more often than not, bull markets end when a recession hits or some kind of financial shock strikes.

But right now stock investors are in a buying mood as they focus on positives, such as a strong U.S. economy and corporate America's robust profitability, and shrug off worries related to rising interest rates, trade disputes and recent economic turbulence in places like Turkey.

"As along as the U.S. economy is strong and growing, the job market is stable and growing, and corporate earnings are strong and growing, the market should be and will continue to be strong," says Jamie Cox, managing partner at Harris Financial in Richmond, Virginia.

401(k) investors that have investments in index funds that track the S&P 500 have been rewarded handsomely both in 2018 and during the bull market. A person that invested $100,000 in the broad market index at the market low on March 9, 2009, would now be sitting on a paper profit of more than $320,000. A $100,000 investment in the S&P 500 at the start of this year would now be worth $107,500.

Here are three trends driving the greying bull:

Companies are making a lot of money

Corporate profits in the first two quarters of 2018 are growing at the fastest pace in nearly eight years. Second-quarter profits are on pace for 24.6 percent growth with eight of 10 companies topping analyst forecasts, following nearly 27 percent earnings growth in the first three months of the year, according to earnings-tracker Thomson Reuters.

“The principal driver of the stock market now is strong profit growth and the perception it will continue as the economy expands at a 3 percent clip in 2018,” says Nick Sargen, senior investment advisor for Fort Washington Investment Advisors in Cincinnati.

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Trade war has yet to dent economy

Despite the tit-for-tat tariff fight between the U.S. and China and other trading partners, the levies placed on imports of steel, aluminum and other products, has yet to cause widespread harm to the U.S. economy, which grew at a 4.1 percent pace in the second quarter, its fastest growth since the third quarter of 2014.

“For the time being, this has caused investors to shrug off the threat of trade wars,” says Sargen.

Lindsey Bell, investment strategist at CFRA Research in New York, says many investors still view the Trump administration’s approach to tariffs as a "negotiating tactic."

For now, the main impact of protectionism is being felt abroad, in places like Europe, China and emerging markets. Still, it's premature to declare the U.S. won’t feel the effect, as the bull run last year was fueled by strong global growth, Sargen warns. The market is vulnerable, he says, if the U.S. and China conflict worsens, but a rally could ensue if the conflict lessens.

Stock buybacks provide lift

U.S. companies continue to buy back their own stock at a rapid clip, which boosts their earnings-per-share growth figures because it takes shares out of circulation. Corporate buyback activity also represents a major source of fresh demand for stocks. After a record $189 billion spent on share repurchases in the first quarter, S&P 500 companies are buying at a brisk pace just slightly below the record level in the second quarter, according to S&P Dow Jones Indices.

“Stock buybacks have really juiced returns of those companies with the biggest buyback programs,” says Paul Schatz, president of Heritage Capital in Woodbridge, Connecticut.

So what’s an investor to do?

For now, hold tight, Sargen says, until there is more evidence that overseas economies are at risk due to tariffs.

It's not uncommon for investors to move into the market when major stock indexes like the S&P 500 hit a new record, says Alec Young, managing director of global markets research at FTSE Russell. "New highs," he says, "often beget more new highs." He recommends investors with a long time horizon "stay the course with diversified portfolios."

Cox recommends investors wean themselves off high fliers, such as tech stocks and small-company shares, and move into parts of the market that have not gone up as much, such as companies that sell everyday staples to consumers.

Schatz says going all in now doesn't make financial sense.

“Now certainly is not the time to throw caution to the wind and invest aggressively,” he says.

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