It’s a debate raging across the country that seemingly everyone has an opinion about. From Main Street to Wall Street, everyone wants to know; will the U.S. stock market suffer a severe correction or keep grinding higher?
Let’s examine a couple of valid arguments why the U.S. stock market might keep charging higher between now and the end of the year.
Reason #1: Earnings have come roaring back from the recent pandemic induced recession. EPS (Earnings Per Share) on the S&P 500 are at an all-time high. The 500 largest public companies in the U.S. generated earnings that are up 29% from pre-pandemic levels (2020) and are up 386% from the depths of the forced shutdown. In a nutshell, the largest U.S. companies have never earned more money than they are earning today. I repeat, the largest U.S. companies have never earned more money than right now. Mic drop.
And it's growth in earnings per share that drive stock prices up.
See chart below, 32+ years of Earnings Per Share - it's never been higher.
Reason #2: Interest rates are extremely low (from a historical perspective). Interest rates to valuations are like what gravity is to matter, they are inextricably linked. The higher the level of interest rates, the lower the value of future earnings are worth today, and therefore a downward pull on stock prices. At the same time, higher rates add to the interest on mortgages, business loans, and corporate bonds, which makes it more expensive and harder for individuals and businesses to borrow money. With that said, interest rates are at some of the lowest levels going back decades. Take a look at 10-year Treasury rates over the past 30+ years.
Paul R. Rossi, CFA