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The longest bull market in history shows no signs of abating.
The S&P 500 soared more than 7% in the third quarter that ended on Friday. It was the composite index’s strongest quarter since late 2013. The Dow soared more than 2,100 points, or 9%. All three major stock indexes are near record highs.
The surge represents a strong rebound on Wall Street from the devastation of late January and February. Concerns about inflation and tariffs have receded. Investors have turned their attention to a strong economy and huge corporate profits.
Even the escalating trade war between the United States and China, the world’s two largest economies, hasn’t derailed the stock market.
“At this time six months ago, most people expected the trade issues to lead to a slowdown, and that simply didn’t happen,” said Ryan Detrick, senior market strategist at LPL Financial.
The U.S. economy grew 4.2% in the second quarter. This is the fastest pace in nearly four years. The Atlanta Fed expects economic growth in the third quarter to be 3.8%, down from its previous forecast of 4.4%.
A strong economy coupled with corporate tax cuts has triggered a stunning rise in U.S. corporate profits.
After a surge in the first half, S&P 500 earnings are expected to rise another 19% in the third quarter, according to FactSet.
Wall Street’s strong third quarter could bode well for the rest of the year. When the S&P 500 rises in the third quarter, the average fourth-quarter gain in all years going back to 1945 is 3.8%, said Sam Stovall of CFRA Research. In a midterm election year, the S&P 500 rose an average of 7.1% in the fourth quarter, following gains in the third quarter.
The fourth quarter of an interim year is usually It was one of the strongest quarters in the four-year presidential cycle, according to LPL Research.
“The calendar could be the bulls’ best friend as earnings and the overall economy find their footing,” Detrick said.
So what could cause another wave of turmoil on Wall Street? Investors will be wary of more turmoil in emerging markets, particularly Argentina and Türkiye. Everyone is looking for clues on whether China’s economy can withstand the impact of tariffs.
Wall Street is also closely watching the Federal Reserve’s efforts to transition the economy and stocks away from easy monetary policy.
The Federal Reserve raised interest rates for a third time on Wednesday and signaled another rate hike is possible in December. This decision marks the end of an era for central banks. Long-standing language describing interest rates as “accommodative” was removed, a sign that policy is no longer so easy to boost growth.
If inflation heats up significantly, the Fed could be forced to raise interest rates more quickly to the point of damaging the economy. Friday’s jobs report is likely to provide more evidence of strengthening wage growth, the main driver of inflation.
“Future (Fed) policy mistakes could end this bull market,” Detrick said.
The biggest challenge facing the bull market may be dealing with an impending slowdown in profits as the impact of the tax cuts fades. FactSet expects S&P 500 earnings to grow 7.1% in the first quarter of 2019. That’s a healthy increase, but less than half of the recent peak.
“My most pressing concern is that earnings slowdown next year will cause investors to take profits now,” Stovall said.
CNN Business (New York) First published September 28, 2018: 12:22pm ET