If you’re looking for some colorful fireworks, you can head to your local Fourth of July celebration — and keep an eye on the stock market.
Even though the Standard & Poor’s 500 index has inched up about 8% halfway into the year, hitting a series of record highs along the way, there’s been little reason for many “oohs” or “aahs” at the market’s 2017 display.
But that could change. July historically is the strongest month of the year, with the S&P 500 posting average gains of 1.5% since 1928. Will there be some booms or sparkles in the month ahead? Here’s what investors will be watching.
All eyes on earnings
The weekslong period known as earnings season starts with a trickle and turns into a deluge by mid-July as public companies release quarterly results. This four-times-a-year event hinges on how expectations match up with reality: If a company “beats” or “misses” revenue or profit targets projected by analysts, that can significantly impact its stock price — and the broader market.
The expectation on Wall Street is for positive, but not stellar, second-quarter earnings. That suggests there probably won’t be many big surprises, says Katie Nixon, chief investment officer for Northern Trust Corp.’s wealth management business. As one of three key drivers of stock prices (the others being dividends and valuations, or what investors are willing to pay for earnings), earnings season still is a must-watch event for many investors, she says.
“There are no heroic assumptions built into the market right now,” Nixon says. Still, valuations are high, and that provides some fragility on a stock-by-stock basis if a company’s results don’t “at least chin the bar” that’s been set, she adds.
Earnings season also provides investors an opportunity to hear directly from the horse’s mouth — in this case, company executives. Such commentary can be as insightful as the numbers, particularly if executives share their perceptions about the economy or industry conditions.
The pace of U.S. economic growth came into question earlier this year as reports showed some slowing. There could be signs of improvement mixed into what’s likely to be “a much ado about nothing earnings season,” says Trip Miller, managing partner of Gullane Capital LLC.
One such example: FedEx Corp. The shipping giant recently reported better-than-expected results for its fiscal quarter ended in May, which suggests U.S. growth could be strengthening. “This is one of the best bellwether indicators of what’s going on in the economy,” Miller says.
Even as stocks have inched higher, there’s been very little volatility — which gives some investors reason to worry about what could cause that to change, and when.
The S&P 500 has risen or fallen in excess of 1% on only four of the 120-plus trading days so far this year. By comparison, one of the most volatile periods in recent memory — January and February 2016 — saw such moves three of every five days, on average, as low oil prices and sluggish global growth sparked concerns about another recession.
The stock market already has achieved its average annual return, but investors still lack optimism. Expectations that stock prices will increase in the next six months have fallen about 10 percentage points from the beginning of the year, according to a weekly sentiment survey by the American Association of Individual Investors.
“It’s been an incredible market this year, but it’s been pretty boring — it wouldn’t surprise me to see a little more excitement over the summer,” Nixon says.
The Federal Reserve could cause some nervousness in the market as the time when it could begin shrinking its balance sheet approaches, Nixon adds. The central bank’s balance sheet grew to about $4.5 trillion as a result of stimulus programs in the wake of the financial crisis. The central bank said at its June meeting it could begin a normalization program later this year “provided that the economy evolves broadly as expected.”
As for a sell-off of the 10%-plus variety, Miller doesn’t see any obvious catalysts for one right now, with banks and consumers generally on sound footing. If there is, it could be a good opportunity for investors to buy into the market, he says.
“I’ve been saying we’re long overdue for a 20% pullback and that hasn’t happened — and I sound like a broken record,” Miller says. “Investors need to be cautious but not fearful.”
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More bump from Trump?
Much of the optimism about President Donald Trump’s agenda has faded since earlier this year.
The postelection rally was underscored by hope and optimism among investors about what the new president might accomplish — and that could just as easily shift to frustration, Miller says. “Trump hasn’t gotten too many things across the finish line. We’re halfway through 2017, and nothing’s happened on the tax reform front.”
If there are signs the second half of the year will bring some major policy decision, that could give investors the catalyst they need to push stocks even higher, Miller says. For now, many investors aren’t expecting that, Nixon adds.
“To the extent that we could get something out of Washington, that would be an unexpected positive that’s not being priced in right now,” she says.
Anna-Louise Jackson is a staff writer at NerdWallet, a personal finance website. Email: [email protected] Twitter: @aljax7.