For all the incessant talk over the past month about trade wars, inverted yield curves and recessions, you might have thought the stock market would be much lower than it is. Instead, the S&P 500 has quietly crept up to 3,000, less than a percentage point below its all-time high set in July.
Including dividends, the SPDR S&P 500 ETF Trust (SPY) is now up 21.2% year to date, which, if the year ended here, would be good enough for the best annual return since 2013. Talk about climbing a wall of worry.
The market reflects the fact that, despite facing many head winds, the U.S. economy continues to grow steadily. Gross domestic product expanded by more than 2.5% in the first half of the year, and is anticipated to continue growing at a 2%-plus rate in the second half. At the same time, the jobless rate is holding steady at a 50-year low.
The tit-for-tat trade war between the U.S. and China has certainly been a drag, but not enough to dent consumer confidence and spending. Likewise, the slowdown in Europe hasn’t spread to the U.S., and there’s hope that Federal Reserve rate cuts can buttress the domestic economy from any overseas weakness.
Stocks Following Earnings
To be sure, what happens overseas does matter for U.S. stocks, especially those in the S&P 500, which often have international operations. About 43% of sales for S&P 500 companies come from overseas, according to Standard & Poor’s.
It’s a key reason corporate earnings this year have stalled. Figures from FactSet show that analysts expect earnings for S&P 500 companies to only climb by 1.4% in 2019, the weakest growth since the 2014–2016 period, when earnings last flattened out.
Tepid earnings growth is likely the reason the S&P 500 hasn’t risen much in the past year and a half. Sure, it’s up more than 21% this year, but that’s from the rock-bottom levels of last year, following a 20% peak-to-trough decline.
In fact, the S&P 500 traded as high as 2,873 in January 2018. From there, it’s only risen about 4.4%. That’s not to discount the resiliency of the market—it’s held up extraordinarily well in the face of a lot of negative headlines—but it indicates stocks have largely been moving in line with earnings. Profits have been only inching higher over the past 1 1/2 years, and so has the market.
Measuring Factor Returns
Of course, the S&P 500 isn’t everything. It’s a good barometer of U.S. large cap stocks, but it doesn’t say much about what’s going on with smaller stocks, individual sectors or international stocks.
Markets this year have been far from homogeneous. Those various segments have seen a much different ride than the S&P 500.
U.S. small caps, for example, as measured by the iShares Russell 2000 ETF (IWM), are up 18.7% this year, but still down 8.9% from their all-time highs. U.S. midcaps are up 19.5% on the year, but down 4.2% from their highs.
In terms of factor ETFs, the Vanguard Value ETF (VTV) is up 16.7% year to date, but it’s still being outperformed by the equivalent growth ETF, despite the recent rotation from growth to value. The Vanguard Growth ETF (VUG) returned 25.9% so far this year.