NEW YORK: The blue-chip index tumbled 871 points in two trading sessions following the surprise decision by the U.K. to leave the European Union, but it climbed back 809 points in the next four days. That leaves the index back in a familiar place: near 18000.
And it leaves investors in a familiar quandary: questioning what catalysts could spur the market to new highs. The index has closed above 18000 seven times in 2016, but the longest it stayed up there was for one three-day stretch. It has yet to surpass its record closing, set in May 2015.
Many investors have given up on waiting for something good to happen, said Sameer Samana, global quantitative strategist at Wells Fargo Investment Institute. “They’ve gotten really dour on economic growth, global trade and earnings growth for U.S. companies,” he said.
For the market to go up, he and other investors say, there now needs to be some sort of positive surprise, such as better-than-expected economic news or corporate results.
The Brexit vote helped solidify investors’ expectations for the monetary-policy part of the equation. The prospect of further easing by central banks in Europe and Japan to spur economic growth helped lift global stocks last week.
In the U.S., confidence that the Federal Reserve would do its part was reflected in federal fund futures, which showed Friday that investors and traders see a roughly 23% chance of a short-term rate increase by December, down from 62% before the U.K.’s historic vote last month, according to data from CME Group.
But even as stocks respond well to low interest rates, in the U.S., investors also want to see economic strength and profit growth, even if that could ultimately help justify a turn in rate policy.
“The market has basically gone nowhere since the end of 2014,” said Andrew Slimmon, portfolio manager with Morgan Stanley Investment Management. “It’s really hard to see how the market is going to get out of this unless you see better growth.”
Second-quarter earnings season kicks off this month, and profits at companies in the S&P 500, which have fallen for four consecutive quarters, are expected to decline again, according to FactSet. And the expected decline has grown. On March 31, analysts expected earnings would fall 2.8% in the second quarter, but on Thursday, that anticipated decline had extended to 5.3%, FactSet data show.
For the year, analysts expect earnings growth of about 0.6%, according to FactSet.
Two factors many money managers were counting on to help lift corporate profits lost force in the past week. One is the dollar. A strong dollar hurt companies that do business overseas last year. This year, the dollar weakened, a plus. But since the U.K.’s vote, it has strengthened a bit, threatening to once again cut into the earnings of multinational companies.
Similarly, the drop in the price of oil from mid-2014 through 2015, while a positive for consumers and some companies’ costs, last year battered oil and gas producers. In the second quarter, energy-company earnings in the S&P 500 are expected to shrink by 78% from a year prior, according to FactSet. The boost that other sectors were supposed to get as consumers spent money saved on cheaper gasoline has also been less than some analysts expected.
This year, the price of oil rose 30% in the first half, which bodes well for earnings growth in the energy sector if the gains can hold. Yet since the Brexit vote, the price has fallen 2.2%.
In the third quarter of 2015, the price of U.S.-traded crude averaged $46.50 a barrel. On Friday, oil for August delivery on the New York Mercantile Exchange was $48.99.
If prices don’t slip back, it could be an “incremental surprise” to quarterly results for exploration and production companies in the second half of the year, which could boost stocks, Mr. Slimmon said.
Job creation, which had been steadily growing since the financial crisis, also has faltered. The most recent U.S. employment report, for May, showed far fewer jobs created than expected. It was the weakest month of employment gains since 2010. Figures for June are to be released Friday.
Other economic data has been mixed lately, too. U.S. retail sales increased solidly in May, according to the Commerce Department. But in the same month, the Conference Board’s consumer-confidence index fell.
“The question will be which day do all these things break,” said Mr. Samana.
About one-third of respondents to the latest sentiment survey by the American Association of Individual Investors expect that stock prices will fall over the next six months. That is a decline from the prior week, but is above historical averages, AAII said.
“The biggest reason to be bullish now is caution is everywhere,” said Mr. Slimmon.
