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DOW JONES FUNDAMENTALFORECAST: BULLISH

  • Major US indices extended higher into the end of the week, buoyed by strong bank earnings
  • Fiscal stimulus, vaccine rollouts and strong economic data may continue to support stocks
  • The Dow Jones index is trading at a 26.9 price-to-earnings (P/E) ratio, falling from 29.1 seen three weeks ago

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A slew of upbeat bank results kicked off a robust earnings season, sending the Dow Jones, S&P 500 and Nasdaq 100 indices to their record highs. Among the 22 S&P 500 companies that have reported results so far, more than 80% delivered positive earnings surprises. Goldman Sachs beat EPS estimate by over 84%, thanks to strong performance from its investment banking and trading business. Wells Fargo, JPMorgan, Citigroup and BoA have all smashed analysts’ forecasts with profits boosted by billions of dollars of reserve releases as the recovery took shape.

According to data compiled by FactSet, the estimated earnings growth rate for the S&P 500 is 24.5% for the first quarter. The actual results might be even higher as a majority of corporate America tends to give conservative EPS forecasts and deliver positive surprises. Higher EPS may effectively bring down the price-to-earnings (PE) ratio for major US indices, paving the way for them to drive deeper into record territory.

The US economic rebound appears to be gaining momentum, with the latest retail sales growth data beating forecasts by a wide margin. March retail growth hit 9.8% MoM, compared to a 5.9% estimate. This suggests that President Biden’s fiscal stimulus is working to revitalize consumer demand as households start to spend the stimulus checks. Meanwhile, weekly jobless claims registered their lowest level since the Covid-19 pandemic hit the job market in March 2020, coming in at 576k. This also marked a sharp decline from the previous week’s reading of 769k.

Markets are further supported by the Fed’s dovish stance despite white-hot data released recently. The central bank painted a brighter economic outlook in its latest monthly meeting minutes, while emphasizing that conditions are far from met to trigger a change in its policy measures. Fed officials also saw recent rise in Treasury yields as a sign of recovery, rather than a threat to financial stability. It is worth noting that a 75% vaccination rate in the US may trigger a debate among Fed officials with regards to when to start tapering the asset purchasing program, although an interest rate hike is unlikely through 2023.

Across the Pacific, the world’s second-largest economy registered a record growth rate of 18.3% YoY in Q1, partly due to an inflated base effect. Chinese retail sales in March surged 34.2% YoY, beating expectations and underscoring a pickup in consumer demand. Robust recovery in the world’s two largest economies strengthened the global economic outlook and thus underpinned risk appetite across the board.

Valuation-wise, the Dow Jones index is trading at a 26.9 price-to-earnings (P/E) ratio, falling from 29.1 seen three weeks ago. Looking ahead, earnings normalization may continue to bring down the P/E ratio and create room for the Dow Jones to aim higher levels.

Dow Jones Index vs. P/E Ratio – 5 Years

Source: Bloomberg, DailyFX

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— Written by Margaret Yang, Strategist for DailyFX.com

To contact Margaret, use the Comments section below or @margaretyjy on Twitter