After the hot start of S & P until 2019, the risks are looming

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Investors breathe a sigh of relief. Instead, they may want to buckle up.

It has now been more than four months into the year and the sharp drop in investor panic towards the end of December is a distant memory.

The Dow Jones Industrial Average – which plunged 38.38 points or 0.1% to 26,504.95 last week – has gained 14% in the first four months of 2019, its best start since 1999. the S & P 500 index, up 0.2% at 2945.64, had its best start since 1987, while the Nasdaq Composite, which rose 0.2% to 8164, had its best start year over four months since 1991.

There are good reasons for the market rally. The Federal Reserve has stopped raising interest rates and, if last week's meeting had to be unanimous, the central bank would probably remain on hold. Trade talks with China are well underway, and reports suggest that an agreement could be reached as early as next Friday.

And then there are the profits of the companies. While the earnings season is over three-quarters complete, earnings are expected to grow 0.9%, according to Refinitiv's IBES data. It's not fantastic, but it's much better than feared – much better than the 2015 and 2016 earnings recession, "said Kate Austin, Equity Research Analyst at Adviser Investments.

At the time, profits and revenues fell in parallel for three consecutive quarters. This time, revenues have not stopped growing. First quarter sales are expected to increase by 5.1%.

So, what's stopping profit growth? The adjustments related to the tax, says Austin. For example,
McDonalds

(symbol: MCD) posted a profit of 1.72 USD in the first quarter, missing the Wall Street consensus of 1.76 USD. Strip a six-cent charge related to taxes, however, and it actually beats. The result? "The underlying companies are healthier than their earnings growth rates suggest," says Austin. "People were expecting the worst after the fourth quarter, and it's just not the worst."

Nevertheless, much of the good news could already be reflected in the market. The S & P 500 has risen 25% since hitting a low of 2351.10 on December 24, the fourth-quarter low. The index is now trading at 16.97 times earnings at 12 months, just after the peak reached in September 2018. "All bounced back so fast," says Megan Horneman, director of portfolio strategy at Verdence Capital Advisors .

Do not expect them to go much higher. Lori Calvasina, head of US equity strategy at RBC Capital Markets, expects companies in the S & P 500 to earn $ 171 per share in 2019, just over $ 166 compared to the previous year. Bloomberg's current consensus. This implies a warm growth rate of 5% this year. According to Calvasina, only four periods have passed since the financial crisis, during which companies recorded single-digit earnings growth. The price / earnings ratios developed only modestly under these conditions. This could prevent the valuation from rising well above 17 times earnings, which would put the market at its price target of 2950.

Of course, the market could go higher. Higher-than-expected earnings could push the S & P 500 above Calvasina's target, just as investors may want to push market multiples even higher, such as Fed rate cuts. But with the so high valuation of the S & P 500, risks can weigh down, she says.

What risks? Think about it: a stronger dollar, weaker economic data than expected and even worries about the US presidential election of 2020. "We do not expect the same violent reduction as that of the fourth quarter, but the risks are high, "Calvasina said. "There are good reasons to be cautious."

She recommends leaving high-value industries, such as software and semiconductors, and cheaper industries, such as finance. Horneman of Verdence Capital recommends keeping more money to make a withdrawal.

If the market skyrocketed, it could mean leaving some gains on the table. But after a massive rally, prudence is a virtue.

Write to Ben Levisohn at [email protected]