Corporate earnings are likely to rise long enough to send the Standard & Poor’s 500 Index to a record after accounting for inflation, according to Michael T. Darda, MKM Partners LLC’s chief economist and chief market strategist.
As the CHART OF THE DAY shows, the S&P 500 has yet to surpass its two previous peaks on an inflation-adjusted basis even after setting records in the past six weeks. The so-called real values were based on the consumer price index, as compiled by the Labor Department.
The real record for the S&P 500 was set in March 2000, and the index would have to rise 28 percent from yesterday’s close to surpass that high. A 7 percent advance would lift the U.S. stock gauge above its peak in October 2007.
“The S&P 500 should have a solid shot at reaching an all-time high in real terms,” Darda wrote yesterday in a report. Several years of earnings growth lie ahead, he wrote, because of the availability of workers and the Federal Reserve’s efforts to bolster the economy through monetary policy.
Last month’s unemployment rate of 7.5 percent was higher than in nine years when profit margins peaked since World War II, according to data cited in the report. Consumer prices for the 12 months ended in March increased 1.5 percent, less than the Fed’s 2 percent inflation target.
“The labor market remains loose and the Fed is trying to support the business cycle instead of leaning against it,” the New York-based strategist wrote. The opposite would have to be true before margins fall and stocks follow suit, in his view.
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