The S&P 500 index, the Nasdaq composite and the Russell 2000 all closed at record highs Friday, reflecting investor faith in a single fundamental fact: Big American companies are making lots of money.
For much of the year, the stock market has been on the ropes. Trade wars have erupted, the Federal Reserve raised rates, emerging market currencies collapsed, and major technology firms faced regulatory scrutiny — and, in the case of Amazon, presidential broadsides via messages on Twitter. Investors quailed at times, sending stocks down by as much as 10 percent.
But the 9-year-old bull market — which became the longest on record on Wednesday — never completely crumbled. By April, stocks had started a fresh climb. And after advancing Friday, the S&P 500 index, the Nasdaq composite and the Russell 2000 indexes all closed at record highs, reflecting investor faith in a single fundamental fact: Big American companies are making lots of money.
“We’ve had record earnings growth, we’ve had record numbers of earnings and sales beats,” said Savita Subramanian, chief U.S. equity strategist for Bank of America Merrill Lynch. “Basically the fundamentals couldn’t look better.”
Because owners of stock are entitled to a share of the money a company makes, corporate profits are a key ingredient of stock market rallies. And profits for companies in the S&P 500 were up roughly 25 percent in the second quarter, after a surge of 27 percent in the first quarter, according to data from Thomson Reuters I/B/E/S.
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About 80 percent of companies reported results that were better than Wall Street analysts expected. (In a typical quarter, some 64 percent of companies outperform analysts’ predictions.) This year’s crop of quarterly earnings has been the best since 2010, when the U.S. economy was just emerging from the recession that ended the previous year, making big leaps in annual profit growth much easier.
The current rosy profit picture shouldn’t be surprising. The Trump administration’s deep tax cuts that went into effect in January reduced corporate tax expenses sharply and raised profitability almost automatically. But other metrics — such as sales growing at an annual rate of more than 9 percent in the second quarter — suggest that corporate America is riding a robust U.S. economy. The unemployment rate is near 18-year lows. Gross domestic product expanded by 4.1 percent in the second quarter, the fastest pace since 2014.
“It’s a 3-percent-plus growth world, and that’s because the fundamentals underlying consumer spending, underlying business spending, underlying our manufacturing sector are in superb shape,” said Allen Sinai, chief economist at Decision Economics, a consulting firm.
Since the bulk of companies began reporting their quarterly results in July, that upward economic pressure has erupted in gushers of profits, especially at some of the giant technology-centered firms that have been hugely influential in determining how the stock markets move.
Amazon reported a $2.53 billion quarterly profit, its largest ever. Microsoft notched $8.87 billion in earnings, beating estimates. Apple’s quarterly profit jumped 32 percent to $11.52 billion, beating Wall Street expectations and pushing the company’s market value above $1 trillion, a milestone that no American company had ever reached before.
The earnings boom has also reached far beyond tech. Earnings at financial firms jumped more than 27 percent. Quarterly profits at industrial companies rose 20 percent.
Even the retail sector, which has been squeezed by online competition and soft prices in recent years, is enjoying a respite.
There could be more market gains to come. From the bargain hunter’s perspective, the combination of blockbuster profits and a prolonged stock market soft patch for much of the year, means that stocks — compared to their earnings — are significantly cheaper than they were earlier this year.