The S&P 500 at 3,000 Is No Reason to Celebrate

The stock market reached a milestone on Wednesday, with the S&P 500 Index briefly topping 3,000 for the first time before falling back to close at 2,993.07 in New York. The catalyst was comments by Federal Reserve Chair Jerome Powell that suggested the central bank is definitely on track to cut interest rates at the end of the month. But before popping the Champagne corks, it’s worth pointing out just how middling the bull market has become.

Despite having rallied 19.5% this year, the S&P 500 is up only 4.18% since late January 2018, when President Donald Trump kicked off the trade wars by slapping tariffs on imported solar panels and washing machines from China. Such paltry returns can hardly be described as animal spirits. In fact, they are even below the 6.98% gain generated by the financial world’s ultimate haven, U.S. government debt, as measured by the Bloomberg Barclays U.S. Treasury Index. (Yes, the S&P 500’s return jumps to 7.30% when dividends are included, but that’s not impressive for an economy the White House likes to describe as the strongest in history.) Make no mistake, this is a fragile market. In the last nine months alone, the S&P 500 has plunged by at least 6.50% three times, after having gone without a single monthly decline of that magnitude since 2011. And while the rebound from May’s sell-off looks impressive on the surface, it’s been led by companies tied to the price of oil, which has been surging as supplies drop. Those companies that are more closely tied to the broad economy are struggling, with the Dow Jones Transportation Average falling on Wednesday, extending its loss for the month and bringing its decline from this year’s high in late April to 7.27%. It’s not that stocks are overly expensive at a price-to-earnings multiple of 18 times this year’s expected earnings, up from about 15 at the end of last year, but that multiple expansion is due solely to the drop in bond yields, which make future earnings cheaper today, rather than an increase in profits. In fact, Wall Street strategists have been steadily lowering their full-year earnings estimates for the S&P 500 from $172 in January to $166 now, according to Bloomberg News.