Stocks expensive, investors remain bullish, here comes another week

The S&P 500 managed another positive week, if only just. It is still early days for the earnings season, and so far, it’s possibly fair to say that the current outcome is mixed. On the plus side, the blended (year-over-year) earnings growth rate for the S&P 500 is 3.4%; on the negative side, this is below the expectations of just over 4%. Nine S&P 500 companies have issued negative EPS guidance, and 5 S&P 500 have issued positive EPS guidance. So far, it’s been a positive quarter for banks, but less so for industrials, according to FactSet.  On the macro front, the data continues to suggest the US economy is resilient. The list of household names reporting this week is too long to list in its entirety.  Some of the headliners will be Amazon, Coca-Cola, Texas Instruments, and American Airlines. The Federal Reserve will also release its Beige Book, a summary of economic conditions across the 12 Federal Reserve Districts. It may provide hints about the central bank’s outlook on inflation, employment, and overall growth.

In the past week, the Vix index fell back below 20. According to the weekly AAII investor sentiment survey, retail investors remain bullish for the upcoming months despite almost half of those surveyed considering the US market expensive. Retail investors are not the only ones remaining optimistic about the outlook for stocks. According to the latest Merrill Lynch Fund Manager Survey, October saw the biggest monthly inflows for equities in 4 years. A combination of a growing belief that Trump will triumph, the US economy will continue to grow next year, rates will further come down, and higher inflation rates are a thing of the past. Concerns on valuation now seem less at the forefront of investors’ minds.  In his daily Bloomberg commentary, John Arthurs highlights that the S&P is more expensive than on the eve of the Great Crash in 1929, and not much cheaper than when the dot-com bubble burst in early 2000. He also points out that equities relative to bonds look expensive. That, too, has been the case for a while.

This is a relatively quiet week on the macro front; the monthly flash PMIs will be released this week. At the end of the week, we get the monthly US durable goods orders and the Michigan final reading for consumer sentiment and inflation expectations. We also have the annual meeting of the World Bank and IMF this week. Finance ministers and central bank governors from around the world will gather in the US capital to discuss the state of the global economy. Then there is the ever-looming budget, in which it is becoming more apparent that those with assets have the most to fear from Ms Reeves. Stocks in Europe appear to be opening on a mixed note. China’s commercial lenders cut their benchmark lending rates on Monday, as policy makers continue to try to boost that economy.