Surging profits, a humming economy, lower Treasury rates. The things that used to rev up the stock market are no longer able to get its motor running.
Suddenly it seems like everything is a headwind. The US Federal Reserve is raising rates. Cost pressures are percolating. Valuations are under siege and a decade-long bull market is at stake.
Rather than provide comfort, earnings have become a source of anxiety, with next year’s estimates falling for the first time this year.
In real life, the present determines the future. In the stock market, it’s the other way around. Investors are looking weeks and months ahead, and finding nothing to get excited about. As a result, the S&P 500 is on its way to the worst month since 2009 and everyone’s in a state of disbelief.
It used to be that however glum stock traders got, earnings season would arrive and cheer them up. That it hasn’t happened this time around is a big source of the current anxiety. The numbers have been indisputably great – profits will rise more than 20pc for a third straight quarter. But an outsize focus on higher input costs and tariffs is stealing the spotlight.
Another thing sapping faith is how persistent the losses are now. Losses are coming at more than twice the frequency of the last three corrections, messing with investor psychology and introducing worries that maybe this time is different.
In the US economy, things are so good people are wondering if they can get much better.
Next week’s jobs report is expected to show the unemployment rate in October has dropped to the lowest since the late 1960s. Consumer comfort is hovering near all-time highs and the US economy grew 3.5pc in the third quarter as spending jumped.
“The growth surge in Q2-Q3 represents the high-water mark for the US economy,” said Leslie Preston, senior economist at Toronto-Dominion Bank.
“Growth is expected to come off the boil over the next year as the fuel from fiscal stimulus is spent, but still grow above the economy’s potential.” In the absence of future catalysts, bulls are left simply to announce that everyone who is selling stocks is wrong. Investors need to come to their senses, said Peter Jankovskis, co-chief investment officer at Oakbrook Investments.
Trade has been an issue all year, the Fed has telegraphed that it’s raising interest rates for some time now, and the economic data has been strong.
We need to “get to the point investors can pause and take a breath instead of having these up 2pc, down 2pc days”, Mr Jankovskis said. “Once they do that and begin looking at company results, we’ll see the beginnings of a more sustained recovery.”
The concept of “peak earnings” has been talked about for months, ever since Caterpillar said it might have seen a high-water mark of expansion.
But peak earnings really means “peak earnings growth”, according to Dan Suzuki, at Richard Bernstein Advisors – profits are still going up, just not as fast.
Since 1980, earnings growth has peaked 11 times, according to Mr Suzuki, and in the years following 10 of those periods, S&P 500 returns were positive with an average gain of 18pc. Furthermore, it’s not like the list of future catalysts is completely empty. Maybe the end of the US midterm elections will usher in more certainty or calm.
A trade deal between the US and China could still be reached. And the Fed could slow its rate-hiking path, although that may take a much more negative reaction than the one we’ve currently seen in stocks. Still, those are all ifs.
“The only way we find a bottom is if the [Fed] signals they may tactically pause and reassess the economy in the first half of 2019, after the December move, and if Trump and Xi come to a comprehensive agreement in principle at G20 when they meet at the end of November,” said Barry Bannister, head of institutional sales strategy at Stifel Nicolaus in Baltimore. “If so, that’s a Santa Claus rally, but until then, it’s Halloween every day for investors.”