What’s Next?
Earnings will be particularly critical for markets this week, the first busy week of earnings season with 100 S&P 500 companies slated to report results. Although earnings may present an opportunity for stocks to push higher, they are also a risk. Should earnings estimates get revised sharply lower during this earnings season (as they were last quarter) and push out the return of positive earnings growth, stocks may have a more difficult time adding to recent gains. We continue to expect strong earnings improvement beginning in the second quarter (the current quarter), and we continue to believe that the consensus expectations for mid-single-digit earnings gains in the second half of 2016 are achievable, should the drags from oil and the strong U.S. dollar abate. (For more on earnings, see our recent earnings preview.)
Bottom Line
After such a strong rally off of the February lows, the key question for markets is: Where do stocks go from here? A look at historical stock market performance after sharp rallies does not sway us from our expectations for modest, mid-single-digit returns for stocks in 2016. We acknowledge that technical conditions for the market have improved, sentiment remains relatively contained (there is still a wall of worry to climb), and the potential exists for a strong earnings rebound in the second half of 2016. These factors, along with dimming prospects of recession, have left us a bit more constructive on stocks than we were at the start of the year.
But several risks prevent us from considering getting more aggressive here, particularly the potential for oil to give back recent gains (WTI crude oil futures opened 6% lower overnight after global oil producers failed to agree to a production freeze, but pared losses after trading resumed in other markets). Other market risks we continue to follow closely include a possible “Brexit” (the U.K. exiting the European Union), a potential hard landing in China, and U.S. election uncertainty.
Burt White is chief investment officer for LPL Financial.