Despite a Solid Q1 Earnings Season, Confidence in Stock Market Is Tumbling

Investors Are Increasingly Pessimistic about the Stock Market

Despite Wall Street reporting solid first quarter earnings, investors have become increasingly pessimistic about the future of the stock market. After a tumultuous start to the year, investor sentiment has gone from euphoric to negative. Stocks have struggled to break out of a tight trading range since the start of 2018, putting the current, nine-year bull-run in jeopardy. For the first time in years, it’s a tough time for stock market bulls. According to an April poll, just 33% of people expect stock prices to increase over the next 12 months. In January, a record 51% of investors were bullish on the stock market.¹ What’s changed? In late January, the S&P 500 was trading near a record 2,850 and the Dow Jones Industrial Average was north of 26,600. Since then though, the stock market has been extremely volatile. By the end of April, concerns about inflation, trade wars, and conflict with Iran help send the S&P 500 down by 200 points and the Dow down more than 2,500 points. Meanwhile, the stock market continues to face headwinds as investors grow increasingly concerned about the ongoing health of corporate earnings and rising bond yields. Do stock market investors have good reason to be contrarian? On the bright side, the first quarter earnings season was encouraging. For the first quarter, 81% of S&P 500 companies have so far reported their financial results, and of those, 78% have reported positive earnings per share (EPS) surprise and 77% have reported a positive sales surprise. If 78% is the final number, it will be the highest percentage since the metric was first tracked in the third quarter of 2008.² First quarter blended earnings growth for the S&P 500 is currently at 24.2%. If 24.2% is the final growth rate for the quarter it will represent the highest earnings growth since the third quarter of 2010 (34.0%). But first quarter earnings are already in the past, it’s the future that investors are concerned with. And it’s going to be pretty tough for the U.S. economy to live up to President Trump’s lofty expectations in 2018. At the start of the year, economists were looking for 3.5% gross domestic product growth (GDP). But the advance estimate for first quarter GDP came in at just 2.3%. The U.S. is not going to slide into a recession, but it certainly looks like the U.S. economy is going to fall short of expectations in 2018.³ A trade war with China, the world’s second biggest economy, and concerns about the success of the North American Free Trade Agreement (NAFTA) may force corporations to delay investment plans. It could also result in increased supply chain disruptions. There are also signs that growth in Europe, the world’s largest economic block, is moderating. Moreover, growth emerging markets are expected to slow down more than expected in the second half of 2018.

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1. Egan, M. “America’s confidence in the stock market is crumbling,” CNN, April 30, 2018; http://money.cnn.com/2018/04/25/investing/stock-market-confidence/index.html.

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