S&P 500 Holds Near Record Despite Rate, Oil Headwinds
The S&P 500, tracked by SPY, remains 1.8% below its record close even as markets brace for a Fed hike, a 10-year yield near 5% and crude above $100. The piece says strong earnings growth is helping offset tighter financial conditions.
The Federal Reserve is widely expected to raise interest rates Wednesday. The 10-year Treasury yield is near 5% and crude is above $100 a barrel. When those headlines are read together, they would normally point to a weaker Wall Street and pressure on tech, but that is not what is happening. 99 set Aug.
85% year-to-date. The gap between tighter financial conditions and an equity market that has not broken comes down to earnings, which the data show are still outrunning the macro shock. "Either development would normally be enough to break a global bull market in stocks. Neither has so far.
That's because corporate earnings keep climbing," Ed Yardeni, president of Yardeni Research, wrote Sunday. Higher bond yields lower the present value of future corporate profits and make government debt relatively more attractive than stocks, but that valuation pressure is less damaging when earnings are rising quickly. 3% in the fourth quarter, and that would put growth above 25% for a third straight quarter and in double digits for an eighth consecutive quarter. Full-year earnings are seen rising 32%.
S. 5%. 6%. Fed-funds futures have already priced in most of the move, helping Treasury yields and equity valuations adjust ahead of Wednesday’s decision.
5% probability of a 25-basis-point hike as of Sept. 75%. A second hike is almost fully priced in by year-end. A sustained move in the 10-year yield above 5%, another jump in oil, or unexpectedly hawkish guidance from Fed Chair Kevin Warsh could force investors to reassess valuations.
Wednesday is a Summary of Economic Projections meeting, with the dot plot due alongside the policy decision. A rate hike is already priced in, but a dot plot signaling several more is not. The market can handle a higher discount rate while earnings are still growing 28%. It cannot do so if earnings estimates begin to slip.
The third-quarter reporting season, due to start in three weeks, will be the next test. For now, earnings growth remains in control of the tug-of-war.