The stock market is on fire in 2018. In just 13 trading sessions, the S&P 500 and Dow have rallied close to 5% each, with the Nasdaq closing in on a 6% year-to-date gain.
So what’s with the melancholy attitude, Wall Street bears?
There’s no sugar coating it: the stock market will, at some point, endure a correction. But timing is what needs to take focus here. Some of the best and most respected analysts on the Street have said stocks will continue to rally in 2018. And they have good reason to be bullish: tax reform is likely to unleash a wave of much better than expected profit reports this year and next. Giant companies such as Action Alerts Plus holding Apple, Boeing and Disney could blow away Wall Street with their earnings this year, only feeding the bullishness.
So why go to cash here?
“I’ve been bullish for two years now,” said Karyn Cavanaugh, SVP and senior market strategist at Voya Investment Management to TheStreet. “The market is not overvalued.”
Cavanaugh’s chief driver for her market optimism is strong earnings, which in turn power a stronger stock market.
“Earnings are good and getting even better,” said Cavanaugh. One of the reasons earnings are getting even better? The aforementioned tax reform, the tailwinds of which the market hasn’t even fully priced, Cavanaugh said.
“There are still benefits to be seen,” Cavanaugh believes. “These policies are unleashing growth.”
Wall Street Races to Hike Profit Estimates as Tax Reform Benefits Kick In
Plus, a more competitive corporate tax rate in the U.S. could generate a string of reactionary tax cuts throughout the world so that foreign countries can stay in the game. “We don’t know how high it’s going to lift the tide,” she said.
Among the biggest arguments bears are making right now follows the logic of Sir John Templeton: “Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.”
It’s been a somewhat popular opinion that this market is in the euphoria stage, with bears sitting anxiously by waiting to clock the bull market’s time of death. And as stocks ready to turn the corner on a tenth year of positive momentum, it makes some sense.
But the bears have more waiting to do. To those saying this bull market is in its final innings, Cavanaugh counters with this: “I think it’s a double header.”
“We’re nowhere near euphoria,” she said. “There are still a lot of naysayers.” That could easily be seen in a stock such as truck engine maker Cummins. Despite corporate tax reform, shares only trade at a mere 16 times forward earnings estimates on a P/E basis.
To be sure, there will always be market pessimists. The key for any investor worried about stocks going too far, too fast isn’t diversifying, or “casting a wide enough net,” Cavanaugh added. A diversified portfolio narrows investors’ exposure to risk, plus widens their exposure to gains. Cavanaugh pointed to emerging markets, which rallied almost 38% in 2017, as a smart means of expanding that net.
And to those bears who say stock price appreciation will slow this year, you could be right. Last year will be hard to beat. But even for Goldman Sachs analysts who said the S&P might only rally 13% through 2020, we say this: You’ll still have 13% more money than you started with. So, stop being dumb … market bears.
