In addition to receiving a few questions about Bitcoin from a few relatives over Thanksgiving, the other common question/comment was “can you believe this stock market, how long can it last.” I confess I do not believe in market timing nor do I have a crystal ball; however, that does not mean one should put their head in the sand and ignore important market signals. Aside from the importance of monitoring weekly economic data reports, investors can review a couple of high level data points to gain perspective on the health of the economy and companies broadly. Just as earnings growth is important to evaluate at the company level, market level earnings are important as a rising tide may be lifting all boats. There is truth to the fact that stock prices have a tendency to follow earnings and that is clearly evident in the below chart.

From late 2014 through early 2016, S&P 500 earnings (green line above) were range bound and moved sideways during this period. The S&P 500 Index moved sideways over this time period as well. The market bottomed in February of 2016 and the beginning of the S&P 500 uptrend coincided with an improving earnings picture.

The below chart is a different look at the earnings picture by showing the 12-month forward growth rate expectations for the S&P 500 Index. The chart showings earnings growth at 10.1% looking twelve months out into the future and if stock prices follow earnings, market returns could be in the low double digits too.

I suppose the market’s resilience, i.e., very little downside volatility could be viewed as a concern. The last greater than 5% market pullback occurred over a year ago, in June 2016, and the average intra-year pullback since 1980 is 14%. 

The market will experience another pullback and some investors seem to be waiting for this event before investing any additional cash into stocks. This in and of itself may be a reason the market is experiencing shallow pullbacks as investors seem to be ‘buying on the dips.’