Markets

Michael P. Regan is a Bloomberg Gadfly columnist covering equities and financial services. He has covered stocks for Bloomberg News as a columnist and editor since 2007. He previously worked for the Associated Press.

Are U.S. stocks really still in a bull market?

Technically, yes. Only a bear market can kill a bull market, and traditionally it takes a 20 percent plunge from a peak to mark the beginning of one. The S&P 500 is down about 4 percent from its last record, and it never officially experienced a 20 percent drop, even amid the ugliness of August and January, so the bull is still running, at least theoretically.

But it sure doesn't feel like it. The main reason is that last record was such a long time ago -- May 21, 2015, almost a full year. And in fact the level that the index is trading at now was first reached in November 2014, so it is basically where it was a year and a half ago.

And there just doesn't seem to be much in the cards to fuel a lot of optimism about a return to that record anytime soon. Certainly not the first-quarter earnings season, where estimates have dropped like a knife and currently call for a 10 percent decline in profits for the S&P 500:

Lowering the Hurdle
While flat growth was expected for first-quarter earnings at the beginning of the year, analysts' forecasts now call for an estimated 10% drop in S&P 500 companies
Source: Bloomberg data (Wendy Soong)
Note: on a share-weighted basis.

It's obviously not just an energy story anymore. Those companies are collectively forecast to post a loss this quarter, but the other nine main industry groups aren't offering a lot to brag about, either: 

Widespread Weakness
Analysts' estimates show most sectors in the S&P 500 are forecast to show declines in earnings
Source: Bloomberg data (Wendy Soong)

Collectively, most companies tend to exceed these estimates by a few percentage points, but it would require an epic beat this time just to get that number back to flat.

So for investors to push this market significantly higher, they would have to be willing to stomach higher valuations. And unlike, say, the dot-com bubble when the stomachs for such things were Kobayashi-like, this particular bull market has yet to inspire such a voracious appetite and such intestinal fortitude.

Rallies have stalled right about the time the S&P 500 approached 19 times trailing earnings over the past six years of this bull market:

Hey 19
The bull market in U.S. stocks has yet to push the S&P 500 P/E ratio above 19
Source: Bloomberg data
Note: Based on trailing 12-month adjusted EPS

It's near that already -- in the neighborhood of 18.6 times earnings. So even if this earnings season were to pull off that epic beat resulting in flat growth, a return to the record close of 2,130.82 would require pushing the P/E to more than 19.3. And again, that 19 figure seems to be the lid -- the highest it got in the last six years was just a hair below it: 18.9886.

But what about the outlook for future earnings? Is that healthy enough to serve as the Maalox needed for investors to stomach a P/E above 19? There are reasons to cross your fingers and hope the profit downturn bottomed in the first quarter and growth could resume -- or at least decreases become smaller -- when reports for the current period roll in.

For one thing, the first quarter likely will be the fourth consecutive period with declining earnings, so the comparisons to the previous year will start to get a little easier. Among the 22 companies in the S&P 500 that have reported for the first quarter so far, earnings have fallen 8.6 percent but beaten estimates by 6.5 percent. And as Bloomberg's Lu Wang reported on Monday, the pace at which analysts are cutting estimates is slowing for the first time in eight months -- an improvement that foreshadowed the bottom of the cycles in 2001 and 2008.

But for that trend to continue, it will most likely require the end of a much more established trend. Namely, companies themselves will have to start issuing more optimistic guidance for analysts to work with. Over the last decade, about 20 percent of companies have issued forecasts for the next quarter, according to Goldman Sachs strategist David Kostin and colleagues. Typically, among those that did, about 73 percent provided guidance below analysts' consensus estimates. 

The most recent estimates from analysts show profit returning to 5.1 percent growth in the third quarter and 10 percent in the fourth, according to Bloomberg's tally. It's important that those projections don't get whittled down to below zero for the bull to get back to feeling like its bullish self again. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Michael P. Regan in New York at mregan12@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net