New Record High For S&P 500 Fuels Broad ETFs

More than a year after last reaching an all-time high, the U.S. stock market did it again today. The S&P 500, the most widely followed benchmark of U.S. stocks, reached as high as 2,143.16, surpassing its previous intraday record high of 2,134.28 from May 20, 2015. The index also registered a closing high of 2,137.16 today, surpassing the previous closing high of 2,130.82.

S&P 500

Exchange-traded funds that track the S&P 500, such as the SPDR S&P 500 ETF (SPY | A-97), the Vanguard S&P 500 Index Fund (VOO | A-97) and the iShares Core S&P 500 ETF (IVV | A-97) followed suit, hitting new intraday record highs of their own.

Volatile Year

The year between highs for the market had been tumultuous one, featuring two big double-digit corrections and numerous smaller pullbacks. In August 2015, a China-driven sell-off sent the market as low as 1,867, or 12.6% below the record high at the time. That correction contained what some called a "mini flash crash," in which prominent ETFs briefly traded well below their net asset values.

Then earlier this year, similar concerns sent the S&P 500 as low as 1,810, or 15.2% below the then-record high. Based on the performance during the first 10 trading days of 2016, it was the worst start to the year for the venerable index.

Yet despite multiple setbacks, after each one, the S&P 500 swiftly recovered as panic subsided. That includes the most recent episode, in June, when the index dropped more than 5% in two days following the “Brexit” vote that surprised the world.

A mere two weeks later, the market hit an all-time high.

Earnings Recession To End?

Aside from various macro scares, perhaps the biggest reason it took more than a year for the S&P 500 to hit a new high is the "earnings recession." According to Bloomberg, profits for companies in the index have declined for six-straight quarters, the longest streak since the financial crisis and Great Recession in 2007-2009, when they fell for seven-straight quarters.

As the lifeblood of the stock market, earnings are a key driver of where the S&P 500 goes. With earnings trending flat to lower for the past year and a half, it's no coincidence that the market struggled for much of that period.

Today's high signals that investors may be feeling more confident that the earnings recession may soon end. While second-quarter earnings are still expected to be negative, growth is anticipated to resume in the third and fourth quarters, and especially next year.

That's because two factors that contributed greatly to the earnings recession―plunging oil prices and a soaring U.S. dollar―aren't weighing on profits anymore.

It remains to be seen how robust any rebound in corporate earnings turns out to be, and whether the economy can avoid any fallout from Brexit or any of the other macro risks hanging over the world.

But in any case, at least today, investors are willing to pay more for U.S. stocks than they ever have before, a reflection of confidence in the earnings and economic outlook.

Contact Sumit Roy at [email protected].