In its July 3 Outlook, the Marietta Investment Team identified six fundamentals that historically have supported stock markets and continue to buttress the current bull market. One of the most important of these is healthy corporate earnings prospects. Because the market has approached what we consider the high end of fair value, a sustainable advance in equity markets should be accompanied by an increase in corporate profits. With the second quarter earnings season nearing an end, Deutsche Bank noted in a research piece on Aug. 25 that S&P 500 aggregate earnings surged 7.9% to a new record high. Excluding financial companies, the gain was an even more impressive 12.4%. Along with these healthy profit gains, companies also grew sales 4.7%, the most in 2 years, and expanded net margins 1.3% to a new all-time high. In the beginning of the year, Marietta’s Investment Team projected 7-9% growth in 2014 corporate profits which led us to forecast an equivalent 7-9% advance in the S&P 500 Index. Corporate profits are on track to reach or exceed this projection.
Earlier this week, the S&P 500 Index surpassed 2000 for the first time ever. The Index has advanced over 8% so far in 2014, in large part due to these strong profits. Wall Street analysts remain optimistic: Howard Silverblatt, senior index analyst for S&P Dow Jones Indices, reports that Wall Street analyst consensus estimates project a rise in corporate earnings of 11.9% for the year. We are carefully tracking the economy and profit margins to verify that these favorable forecasts are reasonable. If they are, a further advance in the market would be warranted.