The S&P 500 has risen a stunning 10% this year, led by strong healthcare and technology gains.
After a robust start to the year, investors are looking to the corporate earnings season as validation for the recent rally in equity prices.
Some argue that the recent gains have outpaced fundamentals and that there should be a reverse in the bullish sentiment. The initial argument that Donald Trump would ignite stimulus from his deregulation and tax-cutting policies have recently been somewhat muted. Now, the equity rally is relying on increased profitability amid an improving economic backdrop and higher interest rates.
Due to the waning Trump optimism in markets, the dollar lost ground, giving up the gains as investors lost faith in fiscal stimulus from Washington.
The flurry of dramatic headlines from the White House has suggested little fiscal stimulus progress will emerge. However, what is startling is that the market never returned any of the gains made on Trump’s hype. This hints that the market will be particularly sensitive to earnings missing expectations.
Energy markets will struggle to deliver on high earnings thanks to oil bouncing below the $50 mark and the bearish rut oil is grappling to shake. The slump in the energy sector will cap the S&P 500’s bullish momentum.
Excluding energy, leaves just technology and financials to carry the S&P 500 to new heights. Only, the technology sector has already added one fifth to its value since the beginning of the year and retracted recently into a bearish market bringing the broader equity market lower.