Both the Nasdaq and the broader S&P 500 closed at record highs on Tuesday on the strength of several blockbuster earnings reports.
The S&P 500 ended the day at 2,933.68 points, just above the historical high of 2,930.75 from back in September 2018. The Nasdaq ended just shy of 8,121 points, beating its all-time high of 8,110 set last August.
Coca-Cola (NYSE: KO), United Technologies (NYSE: UTX), Twitter (NYSE: TWTR), Hasbro (NASDAQ: HAS), and Lockheed Martin (NYSE: LMT) all reported profits that beat expectations, which helped to spur the S&P higher, while both that index and the Nasdaq got a boost from energy stocks which are flying higher as oil prices rise.
This marks one of the fastest rebounds on record after the rough end to 2018. According to John Lynch, chief investment strategist at LPL Financial, we’ve seen “a near-bear market in stocks’ worst fourth quarter since the financial crisis, followed by a V-shaped recovery and the best first quarter for the S&P 500 since 1998.”
Christmas Eve 2018 marked the worst recorded trading days ever for the S&P and Dow. Since then, the S&P has risen roughly 25%, while the Nasdaq is up more than 30% and the Dow is up just over 22%.
And according to JPMorgan (NYSE: JPM) equity strategists, the party should continue. The strategists believe that a recovery in global growth, and another record year for corporate buybacks, should give a boost to earnings and thus stock prices, and drive the S&P 500 to 3,000 points this year.
The strategists said that an end to temporary trade headwinds should lead to a fundamental recovery in global growth, and they expect companies will provide a boost for stock prices by giving positive forward guidance.
“We expect fundamentals to improve on the back of stronger global growth,” the strategists wrote.
According to the group, the outlook for earnings was too pessimistic and they anticipate that the expected decline in first quarter profits will turn around by the end of the reporting period, with S&P 500 companies reporting 4% to 5% earnings surprises and profit growth of between 2% and 3%.
Revenues are also growing at an above-average 5%, which the strategists say is a sign of healthy demand. And those temporary factors that are leaning on margins should fade as the year continues, as recovering global growth and reflationary policies help to improve conditions.
“As for performance, we expect equities to remain resilient during the reporting season as results should hint at a global growth recovery at a time when investor positioning and sentiment remains relatively low,” the strategists said.
While companies will likely continue to reinvest in growth opportunities, the strategists believe the bulk of incremental profits will go into stock buybacks. “After a record year for buybacks in 2018, this year should be even higher at ~$850b, which would alone drive EPS growth of ~2%,” they wrote. “This view is supported by record buyback announcements YTD of $213b led by Tech ~$46b and Industrials ~$40b.”
As of the fourth quarter, there are still existing buyback authorizations of $700 billion that have not yet been realized. The strategists also added that companies—excluding financials—still have excess cash to the tune of $1.5 trillion, and they expect operating cash flow to be the primary source of capital return.
As for what could send stocks lower, the strategists expect fewer negative surprises related to trade and tariffs during the reporting period for Q1.
“While trade and tariffs remains a headwind for margins, companies are softening the drag by raising prices where possible, idling and shifting production to geographies unaffected by tariffs, and/or passing cost to suppliers. If a trade deal were to materialize, it could be a source of positive revisions (mainly through margins) since this catalyst is mostly not in consensus numbers,” the JPMorgan equity strategists wrote. “Goods producers will increasingly highlight rising commodity prices as a risk; however, we expect the majority of the headwind to be passed down to end users given expanding labor markets and reaccelerating global growth.”
For now, the strategists remain overweight cyclical sectors, including technology, consumer discretionary, industrials, and energy.