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To market to market to buy a fat pig. There were two major milestones for US indexes yesterday. The first was the S&P 500 crossing 2 800 points for the first time and the second The Dow crossing 26 000 for the first time.
Yesterday we spoke about the loose connection between current economic conditions and the stock market. The current rally in stocks globally is telling you about what investors think the coming years have in store for us.
Over the last few years, growth has come from the US and China, which resulted in money flowing into the US, and a strong US Dollar. Recently though, that story is changing. Yesterday the Dollar was at its weakest in three years, due to money flowing to Europe. The European growth engine finally seems to have changed from first to second gear! There will be a further tail wind for the EU once the Greece saga is put to bed; After Years of Turmoil, Greece Is Close to Exiting Its Bailout.
At the end of the day, the only thing that matters when determining stock prices are profits being generated. As this Bloomberg article highlights, Behind Roaring Stocks Are Profit Upgrades of Unprecedented Size, profits are keeping pace with soaring markets. To put things in perspective, at the end of 2016 the P/E ratio for the S&P 500 was at 24 times. Going into December 2017, despite a 20% gain for the index, its P/E ratio had improved to 22 times. Thanks to all the above estimate earnings coming in at the moment, the forward P/E ratio of the S&P 500 has improved further to 18.5 times.
Market Scorecard. Even with the record breaking start for US markets, politics got in the way, resulting in a down day for US markets. Friday is when the US Federal government runs out of money, congress has until then to reach a compromise to raise the debt ceiling again. The Dow was down 0.04%, the S&P 500 was down 0.35%, the Nasdaq was down 0.51%, the All-share was up 0.68%.