What's Fueling the Bull Market?

As the stock market continues to soar, it is attracting more money into stocks. That’s what usually happens during meltups. I think the market may be in the early stages of a meltup. I will call it a “meltup” if my 2018 year-end target of 3100 for the S&P 500 is reached within the next 3-6 months rather than the next 12-18 months. To some observers, reaching 3100 by the end of next year may appear to be a meltup since it would mean that the S&P 500 would have risen 51.7% over the three years 2016-2018. 

Maybe so, but let’s see whether earnings continue to rise rapidly, providing fundamental support for the stock gains so far and in the year ahead. A cut in the corporate tax rate, effective next year, along with continued deregulation should bolster profits. So should a continuation of the global synchronized boom. 

Meanwhile, the flow-of-funds case for a meltup is mounting as more hot money pours into equity ETFs. Over the past 12 months through October, equity ETFs attracted a record $375.6 billion of net new money. Admittedly, some of that money might have come out of equity mutual funds, which had net outflows of $51.7 billion over this same period. Collectively, equity mutual funds and ETFs had net inflows of $323.9 billion, the best such pace since September 2014. 

So far, the exuberance for stocks reflected in equity fund inflows is supported by the exuberance of industry analysts about the outlook for S&P 500 revenues and earnings. The weekly “squiggles” data for revenues and earnings show that industry analysts are turning increasingly bullish on the outlook for S&P 500 earnings. They are projecting earnings gains of 10.9% this year, 11.4% next year, and 10.1% in 2019. Presumably, these numbers don’t fully reflect the likely big positive impact of a cut in the corporate tax rate next year. 

If that happens before the end of this year, analysts may wait until Q4 earnings calls during January to get some guidance from company managements on how tax reform will impact their earnings estimates on balance. These calls are likely to be relatively bullish, driving stock prices higher early next year. Forward earnings is up to a record $145.06 per share, 13.2% above the four-quarter-trailing sum through Q3.