The third quarter of 2018 is about to come to an end and the bull market remains intact. The S&P 500 is up more than 8% so far this year, with some of its stocks near all-time highs and many trading above the 200-day moving average. Chiefly, robust economic growth and upbeat corporate earnings helped offset geopolitical concerns, including conflicts between the United States and its trading partners.
Most of the components of the Conference Board’s Leading Economic Index indicated a 3% or more growth rate in GDP in the final two quarters of the year and is on track to hit the Trump administration’s annual growth target of 3%. If that happens, it would be the best yearly performance since 2005, two years before the Great Recession.The economy has already expanded at a seasonally adjusted rate of 4.2% in the April-June quarter, per the Commerce Department. This was the strongest since a 4.3% annual gain was recorded in the third quarter of 2014.
And when it comes to corporate earnings, Q2 growth reached its highest level since 2010, while growth in Q3 is expected to be in double-digits for the 6th time in the last seven quarters (read more: Looking Ahead to Q3 Earnings Season).
In fact, investors are getting optimistic about U.S. stocks, largely because of the encouraging outlook for corporate profits. Per the latest monthly survey of fund managers by Bank of America Merrill Lynch, there is a net allocation of 21% overweight to the U.S. equity market, the highest since January 2015.
The U.S. market, in the meanwhile, survived a scary September. Needless to say, September has traditionally been the worst month for markets, while November and December are generally strong. Valuations, by the way, are reasonable with the forward earnings multiple meeting historical averages and the market’s PEG (price-to-earnings/growth) ratio of 1 being perceived as “fairly valued”.
Thus, more or less everything from fundamentals to sentiment points to a strong year-end rally for the broader markets. This brings us to the obvious question, which stocks to buy? Naturally, you will keep an eye on winners that have been gaining ground for some time now. These growth stocks will continue to outperform as long as the economy is healthy and the bull market chugs along.
But then, which sectors’ growth stocks to choose? Retailers are ruling the roost, thanks to consumers being confident about their well-being and a big end-of-year gain expected due to the upcoming holiday shopping season. Banks are also in the limelight mostly due to rising interest rates, while energy players are doing well owing to rising oil prices.
