Stocks on Track for Weekly Gains as Growth Fears Ease

European stocks and S&P 500 futures were little changed Friday, keeping major indexes on track for another week of solid gains.

The Stoxx Europe 600 edged up 0.1% midday, putting it on course to end the week 1.7% higher. Oil-and-gas companies led Friday’s advance as Brent crude oil rose 0.6% to $62.07 a barrel.

S&P 500 futures were flat after five straight sessions of advances and an increase of 2.6% for the index so far this week.

In Asia, Hong Kong’s Hang Seng advanced 0.6% and Japan’s Nikkei rose 1% ahead of a long weekend, with both indexes up just over 4% this week.

The more positive tone in stock markets has come from reassurance from the Federal Reserve that it would adjust its pace of tightening monetary policy if needed, as well as hopes for progress in U.S.-China trade relations, rising oil prices and signs the U.S. economy remains healthy.

On Thursday, Federal Reserve Chairman Jerome Powell reiterated the central bank’s flexible outlook on raising rates at an appearance in Washington, D.C., while Fed Vice Chairman Richard Clarida separately said low inflation should allow the bank to be patient with future interest-rate increases.

“You basically have a dovish fed and a still strong economy — a positive cocktail for markets,” said Thomas Costerg, senior economist at Pictet Wealth Management.

Investors now see a roughly 18% of one or more additional interest rate rises by late June, compared with a 45% chance a month ago, according to fed-fund futures tracked by CME Group.

That has pushed the dollar lower, helping support a rebound in emerging markets and commodities, and assuaged investors’ fears about the global economy.

Jeroen Blokland, a portfolio manager at Dutch asset manager Robeco, recently increased exposure to stocks in his portfolios on the expectation that growth will continue.

He expects volatility to return, however. “Some kind of turbulence, or phases of elevated volatility, will stay with us because every time the economy hits a soft spot, there will be this chatter about a potential recession coming,” he said. “I don’t think we’ll see the stability we’ve seen in 2017 and the first part of 2018, but I do think it will become less volatile than December.”

Meanwhile, investors have become more hopeful about the trade outlook in recent weeks. Following midlevel trade talks held in Beijing this week, China and the U.S. are moving ahead with plans for higher-level talks, with President Xi Jinping’s economic-policy chief scheduled to visit Washington in late January.

Uncertainty around the trade outlook led analysts in December to rapidly downgrade their forecasts for corporate earnings.

Companies in the S&P 500 are forecast to grow their earnings by 12% in the fourth quarter of 2018, down from a forecast of 18% in July, according to FactSet.

“Earnings estimates were slashed in anticipation of trade war,” said Mike Thompson, head of S&P Investment Advisory Services.

Now, “It’s easier to be optimistic at these [valuation] levels, and there’s more clarity [on the economic and policy outlook]” he added, noting he expects U.S. earnings to exceed expectations by a large margin as fourth-quarter results begin to pour in next week.

The S&P 500 currently trades at 15 times forward earnings, down from 18.6 a year ago.
Source: Dow Jones