Get Ahead of This Market Catalyst NOW!
For the first six months of 2018, the S&P 500 is up 1.7%.
Far from anything worth writing home about, but certainly nothing to lose sleep over either.
Yet most folks I talk to are worried about the stock market. Triple-digit daily drops and Trump tweets have kept stocks on a roller coaster ride all year long.
A 1.7% gain sure seems paltry compared with the 22% the S&P 500 gained in 2017.
However, the Russell 2000 and Nasdaq are posting better gains, up 7% and 9%, respectively, for the first half of the year.
It’s easier said than done. But what you should be keeping your eyes on is the fundamental pillar that ultimately drives stock prices: corporate earnings.
Stock prices are a reflection of corporate profitability, and corporate profits have taken off like a rocket. That will keep this bull market going a lot longer than most people think.
First Quarter 2018: In the first quarter of 2017, the S&P 500 companies earned $26.96 of profits, but that grew to $32.81 in the first quarter of 2018, a whopping 21.7% increase.
Second Quarter 2018: According to Merrill Lynch, S&P 500 earnings grew another 20% in the second quarter, the highest quarterly growth rate in seven years.
As the above chart shows, there is a tight correlation between stock prices and corporate earnings. The recent surge in profits translates into a high probability of even higher stock prices ahead.
In fact, corporate profits should be moving higher for several years to come thanks to the Trump tax cuts, which significantly lower the corporate tax rate.
Here’s the key takeaway: The result of Trump’s tax cuts and higher corporate profits is a significant and long-lasting catalyst for corporate stock buybacks.
In the first quarter of this year, stock buybacks jumped to an annualized $756 billion, a record high that exceeded the previous record of $688 billion in the third quarter of 2007.
Over the last year, the combination of stock buybacks plus dividends hit $1 trillion in the first quarter.
To put that in perspective, since the start of the bull market in the first quarter of 2009, Corporate America spent a total of $4.1 trillion on stock buybacks.
Source: Standard & Poor’s
If you include dividends, the numbers get even more staggering.
I expect Corporate America to continue to buy back its shares, and that builds an upwardly sloping floor of support in favor of higher stock prices.
The S&P 500 is now trading at just over 16 times expected earnings. And while that places it in the middle of valuation levels historically, I think that’s cheap compared with how fast corporate profits are growing.
That’s why, in spite of the recent roller coaster ride for stocks, your best bet is to treat any decline as a buying opportunity.
Here’s to growing your wealth,
Chief Income Expert, Mike Burnick’s Wealth Watch