You are here

US: Strong economy, earnings bets propel S&P 500 to record high

39046589 - 12_07_2016 - US STOCKS.jpg

[NEW YORK] The S&P 500 on Monday broke the record high it held for more than a year as upbeat economic data and low bond yields continued to funnel investors into US equities.

Led by sectors seen thriving in an expanding economy, the benchmark closed at a record 2,137.16 points, overtaking the previous high of 2,130.82 hit on May 21, 2015.

However, the best performing S&P 500 sectors since the previous record have been defensive: utilities, telecoms and consumer staples, all with double-digit percentage gains.

This outperformance in high-yielding areas of the market underscores investor concerns over the economy's resilience in the face of global stagnation. Britain's decision last month to leave the European Union adds to the uncertainty.

The strong performance of defensive stocks also feeds into the idea that ultra low bond yields have pushed fixed income investors into stocks. Yields on 10-year US Treasury notes rose on Monday, but remained close to the record low of 1.321 per cent hit last week.

"We don't have the rising (bond) yields that would typically check the market rally, that's one of the reasons we keep going higher," said Jim Paulsen, chief investment strategist at Wells Capital Management in Minneapolis.

"I certainly think (low bond yields) are creating problems in the bond-like stocks. I wouldn't want to be sitting in utilities or REITs right now."

Despite his concerns, Mr Paulsen said strong economic data - including last Friday's much-better-than-expected payrolls report for June and the expectation that corporate earnings are turning a corner for the better - are supporting the market's run to new highs.

The Dow Jones industrial average rose 80.19 points, or 0.44 per cent, to 18,226.93, the S&P 500 added 7.26 points, or 0.34 per cent, to 2,137.16 and the Nasdaq Composite gained 31.88 points, or 0.64 per cent, to 4,988.64.

The S&P also broke its record intraday high, hitting 2,143.16 points to overtake the previous high of 2,134.72 hit on May 20, 2015. Technology stocks led the way higher on Monday, and the Nasdaq Composite hit its highest level this year.

This week marks the start of a flood of second-quarter earnings from S&P 500 components. Profits are expected to have fallen 5 per cent last quarter compared to a year earlier. They fell 5 per cent in the first quarter.

The S&P is trading at 16.5 times earnings expected over the next 12 months, compared to the 20-year median of 15.5 times, according to Thomson Reuters Datastream.

Alcoa shares rose near 4 per cent after the bell following its second quarter report. The company beat Wall Street expectations in both earnings and revenue.

"When the market can make new highs and... (as) earnings are going to start to improve, the combination is going to give investors more confidence about more equity exposure in the second half" of the year, said Thomas Lee, managing partner at Fundstrat Global Advisors in New York.

"I think there's still plenty of room for the market to gain." Advancing issues outnumbered declining ones on the NYSE by a 2.20-to-1 ratio; on Nasdaq, a 2.06-to-1 ratio favored advancers.

The S&P 500 posted 78 new 52-week highs and one new low; the Nasdaq Composite recorded 161 new highs and 16 new lows.

About 6.26 billion shares changed hands in US exchanges, compared with the 7.84 billion daily average over the past 20 sessions.