Bulls keep buying on the dips

Onwards and upwards. Robust earnings gains from technology giants including Amazon and Microsoft propelled Wall Street to new record highs last week, and the good cheer spread to other developed markets. German and British stocks have also hit all-time highs, while Japan’s Nikkei has hit a 21-year peak.

Every time markets dip investors pour in and buy, says The Wall Street Journal. The S&P 500 has gone for almost 250 trading days without falling more than 3% below its record high, and it hasn’t had a 10% fall, or a “correction”, since February 2016. You can see why investors are so optimistic.

Last week’s passage of a US budget resolution has shifted the spotlight back onto Trump’s tax cuts, which would give profits an additional fillip. But the fundamentals look solid enough without them. “The bull wasn’t born of tax considerations, and it won’t die from lack of tax relief,” as Vito Racanelli puts it in Barron’s. Stocks have been “turbocharged” by strong global and earnings growth, along with the perception on Wall Street that the Trump administration, “for all its faults, isn’t looking for ways to put the screws on corporate America”.

As half of S&P 500 sales are made abroad, it bodes well that the world economy grew by 4.6% year-on-year in the second quarter, up from 3.9% in the first, according to Barclays. The weaker dollar has made exports cheaper, while the US economy “is doing just fine without tax cuts”, adds Gina Chon on Breakingviews. GDP expanded at an annualised rate of 3% in the third quarter. Consumption, which accounts for two-thirds of overall output, looks solid at 2.4% growth and business investment grew by 3.9% year-on-year. So it’s no wonder double-digit S&P earnings rises are expected in 2017 after a nasty profits recession in 2015/2016.

There are other reasons to believe the rally can continue. For one thing, there’s still money on the sidelines, says Citi’s Robert Buckland in the Financial Times. There have been net inflows into global stocks worth $120bn in the past three years, compared with $275bn in the three years before the previous bull market’s peak.

Recent gains in global mergers and acquisition, initial public offerings and capital expenditure look “conservative” rather than frothy, another sign that the euphoria that implies a major market top is absent. Central banks remain supportive. Even though the global bull market is now twice the age of its predecessor (2003-2007), it’s too soon to worry about the next bear market.

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