The S&P 500 has been on a tear since the beginning of 2003. This broad, large-cap market index has eclipsed its highs of late, illustrating just how strong corporate earnings have been over the last couple of years.
We’re currently right in the middle of second quarter earnings season, and, on average, the numbers have been pretty solid from both large-cap and small-cap companies alike. Clearly, there is still a lot of strength in this economy.
As I’ve contended before, this is a very difficult stock market in which to make predictions. Alan Greenspan just told us again that short-term interest rates are going to keep moving up. This isn’t particularly good for stocks. Oil prices remain high. This also isn’t particularly good for most stocks. Still, in the face of this reality, corporate earnings continue to grow. Really, corporate earnings strength is a testament to the high level of productivity and lean operations of corporate America.
Still, we’re about eight years into a strong commodity price cycle, and stocks don’t traditionally do well in these periods. There is a risk of recession on the horizon, fueled by higher short-term interest rates and the potential for housing prices to recede.
Going forward, I’m quite cautious about this stock market. I’d stick with the investment themes previously discussed in this column, and I would most certainly consider some technology holdings. There seems to be renewed enthusiasm for the technology sector, particularly for mid- and small-cap stocks.
Over the very near term, it looks like the S&P 500 will continue to break through new highs. The party isn’t going to end abruptly, but the stock market is due for a bit of rest, so it looks like we might get some consolidation in the third quarter. A solid portion of companies who have already reported their second quarter earnings are expecting the bottom half of 2005 to be pretty strong. If stocks take a break over the next two months, this should present an opportune time to consider new positions, even in the face of higher interest rates.