Evidence the US economy is churning out jobs salvaged the week for equities, sending the Nasdaq Composite Index to its first record close in a year and handing the S&P 500 Index its fifth weekly advance in six since the start of July.
The benchmark for American equity climbed 0.4% over the five days to 2,182.87, its eighth record close in the last month, while the Nasdaq extended its six-week gain to 11% and closed at 5,221.12. Boosted by earnings, technology companies and banks led the advance, while defensive industries such as utilities and phone companies slipped, Bloomberg reported.
In a week that saw the biggest one-day decline for the S&P 500 in a month on Tuesday, bulls were energized by data showing US employers added 255,000 jobs in July, tempering concern that economic growth is slowing. Stocks continued to rise from already-high valuations after the S&P 500’s price-earnings ratio last month climbed above 20 for the first time since 2009.
The S&P 500 is up 6.8% in 2016, three times its gain at this time last year, as stocks enter a month that has seen of some of the biggest losses since the bull market began seven years ago. The gauge fell 6.3% in August 2015, the worst monthly decline since 2012, as concern mounted about the pace of global economic growth.
Bearish Orientation
Reasons for caution abound this year, as well, among them the suddenly bearish orientation of Wall Street equity strategists, many of whom have seen their 2016 projections for the S&P 500 surpassed by a rally that has now added $3.6 trillion to US share prices since markets bottomed in February.
The average year-end target among 20 brokerages surveyed by Bloomberg for the S&P 500 was 2,146 on Aug. 1, a level that after this week’s 9-point advance is 37 points below the index’s closing level. It’s the first time since 2014 that the benchmark has been above the level expected by analysts. A brighter message formed in corporate profits, which showed signs of resilience even though they’re in the process of falling for a fifth consecutive quarter.
With the earnings season more than three-quarters done, about 77% of S&P 500 firms beat profit projections and 56% exceeded sales forecasts. Analysts have tempered their estimates for a decline in second-quarter net income to 2.7%, from 5.8% less than a month ago.
“The most important catalyst for higher equity prices are higher earnings. If economic growth is slowing then stock prices will eventually run out of upside trajectory,” said Scott Colyer, chief executive of Advisors Asset Management in Colorado. “However, markets tend to discount the future and will move in advance of the reported data. That is what we believe is happening here.”
