Confidence in the US equity market's rally continuing into the second half of the year has improved ...
Confidence in the US equity market's rally continuing into the second half of the year has improved markedly following a run of strong corporate results and an upswing in business indicators.
On 6 June, the S&P 500 climbed to a nine-month high, while the Nasdaq reached a 12-month high after recent strong gains.
Keith Skeoch, chief investment officer at Standard Life Investments, believes strengthening corporate profitability backed by improving fundamentals has underpinned recent growth.
'The most exciting development has been the strong performance of corporate America,' he says. 'Although aided somewhat by a weak dollar, company earnings announcements in recent weeks have generally contained positive surprises for investors.'
Skeoch adds the broad-based rally means it has not just been oil companies posting strong growth on the back of high oil prices. Positive earnings surprises have also been seen in the chemicals, pharmaceuticals and financials sectors and the technology sector avoided any shocks.
'We are becoming increasingly confident the worst of the earnings revisions are behind us and we are looking forward to a steady recovery in the second half of the year,' Skeoch notes.
Tom Elliott, strategist at JP Morgan Fleming, feels besides a largely positive corporate reporting season, investor confidence has been buoyed by wider signs of recovery. Both the Institute of Supply Management's manufacturing and services May surveys revealed sharp rises.
'In particular, the strength of the new orders components from both of these surveys bodes well for third-quarter activity,' Elliott says. 'Employment data, however, was more mixed, as the unemployment rate rose to 6.1% in May.
'Some investors may be concerned employment data remains relatively poor but the labour market is likely to be the last place in which a recovery will be seen. Indeed, even 12 months into a recovery, the labour market has often shown scant signs of improvement in the past.'
Skeoch believes unemployment levels remaining high reflects companies' continued caution after a period of major retrenchment across several industries. Corporate profitability has been boosted by the leaner structures they are currently running and unemployment is unlikely to come down until consumer demand shows a prolonged recovery.
Consumer demand could gather momentum over the summer, Skeoch states, supported by lower oil prices and $350bn of tax cuts passed recently, both of which should help underpin the retail and housing markets.
'The nervous optimism displayed by both bond and equity markets will remain intact as long as the day-to-day news is positive,' Skeoch says. 'A decisive end to the bear market, however, will require clear evidence that not only is self-sustaining economic recovery under way but that it is generating a continued upswing in profits.'
Elliott believes a lack of market reaction to the news IBM is to be investigated for possible accounting irregularities reflects the strength of the current recovery and implies it is more than just another rally in a bear market.
Corporate earnings recovering.
Business indicators positive.
Tax cuts should boost consumer spending.
Profits growing from low base.
Unemployment remains high.
IBM under scrutiny for accounting practices.
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