from the July investment comments from Provident Investment
The S&P 500 mostly sputtered through the first five months of 2018, but a strong start to June has pushed its year-to-date performance up to +5.5 percent. Renewed volatility has made this year’s gains feel hard-earned, even grueling. It is somewhat difficult to believe that we are currently on pace for another year of double-digit returns, although we are, at least for the moment. 2018 is unlikely to approach 2017’s spectacular 22 percent return, but how could it? 2017 enjoyed a huge boost from investors suddenly imputing the future benefits of the surprising late-year corporate tax cuts. That trick won’t repeat, although 2018 and beyond should enjoy follow-on benefits as lower taxes promote more business investment and faster overall growth.
Corporate earnings now demonstrate the benefits of those tax cuts. According to John Butters in FactSet’s Earnings Insights from June 7, the S&P 500’s estimated Q2 earnings growth rate is a robust 19 percent. This is driven largely by tax cuts, but also by a strong recovery in energy prices providing a welcome boost to the beaten-down energy sector. Higher energy prices are a double-edged sword for the economy overall because of increased input costs for producers and tighter budgets for consumers. However, the immediate effect on S&P 500 earnings is a net positive….
The overall investor landscape seems reasonably balanced. Stocks aren’t cheap, but neither are valuations outlandish — some exceptions aside. Low long-term interest rates can support high stock values. There is no shortage of optimism in the market, and growth-oriented investors have to work hard to find good companies at fair prices. That is almost always the case, though. We wouldn’t have it any other way.