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MARKET SNAPSHOT: This Epic Stock-market Rally Will Get A Second Wind From Stellar Earnings

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01/13/2018 | 05:45pm CEST

By Sue Chang, MarketWatch

Strategist: If S&P 500 continues at current pace, annualized return could hit 193%

The stock market's stupendous start to the new year could get even more interesting as the corporate earnings season kicks off in earnest next week.

There are high hopes for fourth-quarter results.

Strategists at Bank of America Merrill Lynch project double-digit quarterly earnings-per-share growth to $35.07 for the S&P 500.

"Strong guidance, a healthy global economy and higher oil prices support a pickup in growth, and record U.S. data surprises along with record results from the early reporters suggest to us a beat is likely," said Savita Subramanian, an equity and quant strategist at Bank of America Merrill Lynch, in a report.

John Butters, senior earnings analyst at FactSet, projected S&P 500 companies will report a fourth-quarter earnings rise of 10.2%, the second-strongest since 2011, based on the consensus forecasts of analysts. However, the actual pace of earnings increase may be closer to 14%, he said, given the large number that are turning in results above estimates.

Butters also predicted that all 11 S&P 500 sectors will post both earnings and revenue growth in the fourth quarter, something that has not happened since the third quarter of 2011.

Even more important than the parade of numbers may be what the management has to say about the tax reform, strategists stressed.

This view was borne out during JPMorgan Chase's(>> JP Morgan Chase & Company) conference call early Friday where much of the time was devoted to fielding queries on how the tax cuts will affect the bank's balance sheet going forward.

In December, President Donald Trump signed into law a $1.5 trillion tax package that has been billed as the most comprehensive overhaul in three decades. The new regulation slashes the corporate tax rate to 21%, temporarily lowers individual rates and eliminates Obamacare's individual insurance mandate, among other changes.

The euphoria over tax cuts and a rosy outlook on the economy have continued to fuel a strong rally in stocks, with major indexes setting records almost every day of the new year .

Indeed, based on the first two weeks of the year, analysts are observing that 2018 may be a doppelgänger for 2017.

"It looks a lot like 2017 to this point," Andrew Adams, market strategist at Raymond James, wrote in a recent note. "So much for the idea that investors would welcome the new year by taking profits to finally realize capital gains, an idea that I thought may have some merit to it; investors still see no reason to sell their stocks and we can't really blame them."

Adams said a pullback could emerge at any time given that the S&P 500 is the most overbought in 38 years based on the relative strength index. Even so, there is nothing, he said, that suggests that a major selloff is in the offing.

The first two weeks of 2018 has been overloaded with records.

The Dow Jones Industrial Average has climbed 4.4% and the S&P 500 has rallied 4.2% through Friday for their best start to a year since the first nine days of 2003. And the Nasdaq jumped 5.2%, the best since 2004, according to the Dow Jones Data Group.

In fact, if the market continues to gain at its current speed, annualized return for the S&P 500 could jump as much as 193% in 2018, according to Frank Cappelleri, a technical strategist at Instinet LLC.

To be clear, the point of that outlandish figure isn't that Cappelleri expects that sort of outperformance but as a warning of things to come.

"If we see the advances continue to accelerate like we saw last week, it would indicate that more emotion is being pulled into the trading environment. And emotion and volatility rarely exist on one side of the market. If that happens, it would set up the market for a more material decline," he said.

The companies reporting quarterly results during the week include 28 S&P 500 companies, among them four Dow components. On the list are including Citigroup Inc. (C), Bank of America Corp. (>> Bank of America), Goldman Sachs Group Inc. (>> Goldman Sachs Group), UnitedHealth Group Inc. (>> UnitedHealth Group), Morgan Stanley (>> Morgan Stanley), American Express Co. (>> American Express Company) and International Business Machines Corp. (>> International Business Machines Corporation).

On Friday, the Dow gained 228.46 points, or 0.9%, to close at 25,803.19 while the S&P 500 rose 18.68 points, or 0.7%, to 2,786.24. The tech-heavy Nasdaq added 49.28 points, or 0.7%, to 7,261.06.

Stocks mentioned in the article
ChangeLast1st jan.
DJ INDUSTRIAL -0.35% 25250.55 Delayed Quote.2.15%
NASDAQ 100 -1.24% 7068.6706 Delayed Quote.11.89%
NASDAQ COMP. -0.88% 7430.7436 Delayed Quote.8.60%
S&P 500 -0.59% 2750.79 Real-time Quote.3.50%
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