from the August investment comments of Provident Investment Management
The march higher for stocks continued in the first half of the year, with the S&P 500 up 8.3 percent and the tech-heavy Nasdaq surging 14.1 percent. Combine the advance in stocks with the lack of market volatility — it has been over a year since there has been a correction of 5 percent or more in the S&P 500 — and you start to get curious headlines like “Stocks Post Strongest First Half in Years, Worrying Investors.” Suggesting stocks may sell off simply because they have recently appreciated neglects to account for a lot of information worthy of consideration.
One key consideration is, are stocks currently trading at reasonable levels based on the fundamentals? The forward P/E for the S&P 500 is 17.6, ahead of the 10-year average of 14.0. However, elevated multiples relative to historical levels are supported by the continued hope for tax reform and an infrastructure package out of Washington, solid earnings growth and low interest rates. Undoubtedly, there has been slow progress on policy priorities, but focus is expected to shift to these key initiatives in the coming months.
Based on consensus expectations, earnings for the S&P 500 in the second quarter are expected to grow 6.5 percent. Add in the typical “beat” factor, reflecting the tendency of results to exceed consensus expectations, and earnings growth in the quarter may approach double digits. This would be a strong follow up to the 14 percent earnings growth in Q1, which was the first quarter of double-digit earnings growth since 2011.