Photographer: Michael Nagle/Bloomberg

Market Tunes Out Troubles With S&P 500 Rising to Record, VIX Dropping

Washington is in gridlock and the White House faces scrutiny. Valuations are at the highest levels since the financial crisis. There’s been straight months of outflows from the biggest exchange-traded fund tracking the S&P 500.

Traders shrugged it all off in another positive week for the U.S. equity market that ended with the benchmark gauge at a record -- the 25th this year. The S&P 500 added 1.4 percent for the best week since May, the Dow Jones Industrial Average climbed for the sixth week in seven and the Nasdaq 100 posted the best advance of 2017.

The CBOE Volatility Index ended at 9.51, a 24-year low, falling 15 percent.

As corporate earnings start to trickle in, it’s time for U.S. corporations to show investors what they’re paying for. Expectations for profits, the cornerstone of many a bull case, are some of the loftiest in history by some measures. 

Here’s a breakdown of some of the key components for this season:

Big Expectations

Analysts have high hopes for earnings. Companies in the S&P 500 will earn $130 per share at year-end, compared with current trailing 12-month comparable earnings of about $120, according to data compiled by Bloomberg. That $10 spread is the widest between past and future earnings since 2001.

Market Drivers

While analysts don’t expect earnings to top first-quarter growth, when S&P 500 profits leaped 15 percent from a year ago, they will be counting on the same two industries to be the backbone of the expansion. Expectations for tech profits have steadily climbed throughout the year, with analysts now calling for a 15 percent jump in the group’s bottom line.

“Tech needs to come through but also come through with breadth,” Mark Matthews, an analyst at CLS Investments in Omaha, said by phone. The firm advises on about $7 billion in assets. “There’s a direct relationship between tech and financials and what’s happening in the overall market. It needs to come from more than the likes of the FANG stocks.”

Financial stocks will be in focus as well as bullish calls for earnings temper a bit. Though the yearly estimate for the group hasn’t changed, the gains that were once seen in the first half of the year have been pushed to the fourth quarter, with second-quarter increases now three percentage points lower than at the start of the year.

Seeking Guidance

Investors and analysts also need to hear from companies’ executives. Since the U.S. election, chief executives at S&P 500 companies have been hesitant to talk about future growth. A running yearly average of the number of times companies issued guidance fell to the lowest since 2000, according to Bloomberg data compiled by Bank of America Corp.

Wage Impact

With corporate bottom lines rising, analysts will also be tracking the reasons behind the gains. To Fundstrat’s Tom Lee, that means keeping a close eye on elevated corporate margins that could start to see pressure from rising costs of doing business. 

Inflation may not be good enough for the Fed, but it may be good enough to be a problem for stocks, according to Lee. Unit labor costs have lagged as average hourly earnings have risen -- when they catch up, that could apply pressure to corporate margins that are near bull-market highs.

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