from Provident Investment Management’s investment comments for March 2018
The market will be watching new Fed Chairman Jerome Powell very carefully to discern clues on the future direction of interest rates. The Fed has said it expects to raise interest rates three times over the course of 2018.
If this occurs the federal funds rate would be 2.0%-2.25%, still somewhat short of the roughly 3.0% rate we feel is neither stimulative nor contractionary for a normally functioning economy. The bond market seems to have taken notice, as the 10-year Treasury rate has increased to roughly 2.8%.
For buy-and-hold investors, the [recent] correction coupled with very strong earnings growth has eased market valuation concerns. With 68% of the companies in the S&P 500 reporting through Feb. 9, FactSet Research projects fourth-quarter S&P 500 company composite sales and EPS growth of 8% and 14%, respectively. Importantly, sales growth is accelerating, with the fourth quarter recording the fastest pace in six years.
For all of 2018, analysts expect sales growth of 6.5% and EPS growth of 18.5%, aided by corporate tax reform. This has reduced the 12-month forward P/E ratio of 16.3, 2% above the 5-year average of 16.0 and 14% above the 10-year average of 14.3.