SPX -- Looking Ahead

May 21 21:05 2018 Print This Article

FundamentalsTotal business sales have been ticking along at nearly 6.5% yr/yr. With reasonably strongvolumes and a price/ cost ratio fairly even, pretax margins have been advancing, and bottom linesare enjoying the large extra kicker from the tax cuts. As well, inventories are being managed wellcompared to other growth spurts during this long expansion period. Stock buybacks are surging,providing extra fillips to net per share. But businesses are committing to higher levels of capitalspending as well, which will add to productive capacity in 2019 - 20.Interest rates are in clear up trends across the board and do seem poised to go higher well intonext year as the Fed continues to tighten monetary policy. Inflation pressure is inching ahead andthere is no indication of a sharp acceleration of pricing as yet.There may well be some slowdown in economic growth momentum as this year progresses, butit may well be more modest than I originally expected if business inventories continue to growat a  moderate pace.The earnings / price yield for SPX based on estimated net per share sits at 5.8% and is well abovethe 91 day T-bill yield. This indicates that monetary policy is tightening only gradually and it maynot threaten the market near term.ValuationDespite reasonably attractive fundamentals, I have the SPX as no better than fairly valued lookingright into 2019. So, strong upside from current levels rests on the development of some sort ofspeculative zeal for stocks as the economic / profits expansion matures and the Fed pressesonward in its bid to "normalize" rates.TechnicalsThe SPX is struggling to regain sustainable positive momentum after coming off a generationallystrong overbought condition brought on by the big wave up over the latter part of last year. Iwould like to think the SPX is set for a shot at the former highs over the next couple of months,but I do not think it unreasonable to look for the market to complete a deeper correction thatwould bring it to a more solid intermediate term bottom.SPX Daily

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Capital Markets & Economic Analysis

For investors and traders who desire top quality, conflict free analysis of the capital markets and the economy based on the fundamentals and technicals that drive securities prices. Peter Richardson, CFA and author of Capital Markets & Economic Analysis, was the former chief investment officer and a former NYSE firm partner. He has 40 years experience in the field as analyst, economist, portfolio manager, trader, and CIO.

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