Prospects for stronger economic growth and upbeat corporate earnings are poised to carry US stocks to the first January rise in five years.
The S&P 500 index has climbed 1.8 per cent since the end of last year, marking the best annual debut for the broad market barometer since 2013, Bloomberg data show.
January’s gains represent a continuation in parts, and a slowdown in others, of the so-called Trump trade that sent stocks higher amid expectations that the new administration will deliver policies that will be a boon to corporate America by lowering taxes, cutting regulation and boosting economic growth.
The US economy is emerging from an “industrial recession”, said Peter Stournaras, a portfolio manager at BlackRock, pointing to a long-awaited rebound in corporate profits.
Earnings of companies listed on the S&P 500 are expected to have increased in the fourth quarter by 3.9 per cent from the same three-month period in 2015, according to data from FactSet Research Systems that blends reported results with analyst estimates. Almost two-thirds of groups that have disclosed figures so far have topped Wall Street expectations.
The rise in earnings in the final quarter of 2016 came on the heels of growth in the third quarter that snapped a 15-month decline in earnings.
The materials sector has fuelled the rally in the S&P 500, advancing 4.6 per cent so far this year, following a 14 per cent gain in 2016, and leading the benchmark index. Companies listed on the sector have benefited from President Donald Trump’s campaign infrastructure spending promises and a rise in the price of many raw materials.
“Most experts think that infrastructure projects won’t be approved till 2018, but markets move well ahead of those decisions,” Randy Fredrick at Charles Schwab, said
Shares of materials companies have also been buoyed in part by better than expected results. Indeed, the materials sector has reported 5.2 per cent earnings growth and the earnings beat rate currently stands at 70 per cent, according to data from FactSet.
Technology shares that trailed behind the broader market during the late-year rally have also posted sharp gains as 2017 has begun. The sector has risen by 4.3 per cent in January, its best month since last July.
Investors have warmed to the sector amid signs of a rebound in PC sales, and also an outperformance among chipmakers, Mr Stournaras said.
In another wrinkle in the Trump trade, the shares of financial companies that surged after the election have stalled since then. The S&P 500 financials sector is essentially unchanged year to date, up 0.1 per cent.
The industry “burnt off a lot of gas towards the end of last year,” but “if the economy grows, they will undoubtedly” continue the ascent, Mr Stournaras said.
US stocks lost some momentum by the end of the month amid investor anxiety about some of President Trump’s recent executive orders. But pointing to “a solid fundamental backdrop” Mr Fredrick said “the reasons for long-term optimism are valid and in any bull markets you are likely to have small pullbacks but we have not seen anything that is worrisome yet”.