Are U.S. stocks really still in a bull market?
Technically, yes. Only a bear market can kill a bull market, and traditionally it takes a 20 percent plunge from a peak to mark the beginning of one. The S&P 500 is down about 4 percent from its last record, and it never officially experienced a 20 percent drop, even amid the ugliness of August and January, so the bull is still running, at least theoretically.
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But it sure doesn’t feel like it. The main reason is that last record was such a long time ago – May 21, 2015, almost a full year. And in fact the level that the index is trading at now was first reached in November 2014, so it is basically where it was a year and a half ago.
And there just doesn’t seem to be much in the cards to fuel a lot of optimism about a return to that record anytime soon. Certainly not the first-quarter earnings season, where estimates have dropped like a knife and currently call for a 10 percent decline in profits for the S&P 500.
So for investors to push this market significantly higher, they would have to be willing to stomach higher valuations. And unlike, say, the dot-com bubble when the stomachs for such things were Kobayashi-like, this particular bull market has yet to inspire such a voracious appetite and such intestinal fortitude.
Rallies have stalled right about the time the S&P 500 approached 19 times trailing earnings over the past six years of this bull market.
It’s near that already – in the neighborhood of 18.6 times earnings.
But what about the outlook for future earnings? Is that healthy enough to serve as the Maalox needed for investors to stomach a P/E above 19? There are reasons to cross your fingers and hope.
For one thing, the first quarter likely will be the fourth consecutive period with declining earnings, so the comparisons to the previous year will start to get a little easier. And the pace at which analysts are cutting estimates is slowing.
But for that trend to continue, companies themselves will have to start issuing more optimistic guidance.
The most recent estimates from analysts show profit returning to 5.1 percent growth in the third quarter and 10 percent in the fourth, according to Bloomberg’s tally. It’s important that those projections don’t get whittled down to below zero for the bull to get back to feeling like its bullish self again. •
Michael P. Regan is a Bloomberg Gadfly columnist.
