Amid Strong Earnings, the Market’s Party Looks Likely to Keep Going

LPL’s Lynch, impressed by the profit bonanza, thinks the bull market will extend into 2019.

It’s another boffo earnings performance for US corporations. Second quarter’s haul came in at 25% over last year’s comparable period. And this is why optimism burns bright that the strong bull market, which this showing has propelled, will roll merrily along into next year.

John Lynch, chief investment strategist for LPL Financial, believes that the US trade war with China, while a concern, doesn’t endanger the good time we’ve been seeing for the stock market or for earnings. In a report, he wrote that “this is a meaningful risk, but one that is unlikely to hurt earnings growth next year.”

Lynch cited a Goldman Sachs estimate, for instance, that a 10% tariff on all Chinese imports to the US could trim 2019 earnings per share for the S&P 500 by around 3%.

Rising costs for labor, borrowing, and commodities suggest that profit margins may level off in late 2018, Lynch noted. But the recent increase in corporate capital spending may well offset any cost increases by hiking productivity. The result, he went on, is that “based on where we are in the business cycle, upside is unlimited.”

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Indeed, the 25% earnings boost for the S&P 500 almost matches the 26% gain from the first quarter. Energy firms, benefiting from climbing oil prices, and technology companies are the big impetuses for that good news. S&P earnings have advanced at a double-digit rate for five out of the past six quarters. The impact of the new corporate tax cuts accounts for an estimated 6 to 7 points of the earnings boost this quarter, Lynch pointed out.

This bull market has been called the “most hated in history” because of its slow start along with the economy’s initially sluggish trajectory after the Great Recession. For the moment, that bad rap is a memory.

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