It was another round of records for the broad market last week, with the S&P 500 flirting with new highs after Valentine’s Day and ending the week up 1.3%. And the party kept going today, with all three major indices hitting new highs again. Some of the gains have come on earnings season, which has been a good one. And even though another 870 companies are scheduled to report this week, the broad strokes have already been painted in.
Growth is tracking at a healthy 5% across the market as a whole, which would mark the first consecutive quarter of earnings growth since Q1 2015. At the start of the year, estimates were for Q4 earnings to increase 3.1%. This continued improvement in a wide range of sectors is just more confirmation of our belief that stocks will continue to move higher, because at the end of the day strength is based on underlying fundamentals – especially earnings. With the 2017 outlook improving each week, the future looks increasingly bullish.
Then there’s the Trump administration, which has talked about a big announcement on the horizon regarding tax cuts. There’s not a market in history that hasn’t welcomed tax cuts with open arms. And on top of that, economic numbers released last week show a solid economy as well as a pickup in inflation. All of these factors were viewed as bullish and acted as catalysts to send stocks higher.
I bring this up because improving economic readings combined with higher inflation could be the perfect storm for more interest rate hikes from the Federal Reserve. Chair Janet Yellen’s appearance in Washington last week sparked a boost in the odds we’ll get three 25-basis-point hikes sometime this year from 33% to 41% according to Fed Fund futures, and Goldman Sachs (GS) raised its odds of a rate hike at the next FOMC meeting in mid-March from 15% to 20%. While I don’t think a move in March is likely (unless something drastically changes in the next month), there’s still plenty of time for more rate hikes this year, so they are something we should be prepared for.
For more than a year the market fixated heavily on the Fed’s next move, but ever since the election ended and attention shifted to what’s going on in D.C. the central bank has taken a backseat. This can be good for easing market panic, but the Fed remains central to the future of stocks as interest rates will continue to play a role in performance through 2017.