Some Gas Left in the Tank for the Stock Market Rally?

With the S&P 500 trading up ~18% off its recent August 2019 lows and the Nasdaq Composite up ~25% in the same short period, many are wondering how much further this rally can go.We think there is a bit more gas left in the tank in the short term, but we will have to digest these gains at some point in the coming months before moving higher.

Lets start with earnings:

2020 Earnings Estimates for the S&P 500 came down modestly this week from $177.51 to $176.47.At the time of writing, the S&P 500 is trading at 3,327, which implies a forward earnings multiple of 18.85.This is high relative to the five year average of 16.7x, but low relative to the multiple usually achieved in the latter parts of a cycle (low 20s).

Despite trading at an elevated multiple, relative to the ten year yield (currently 1.58%) equities are somewhat fairly priced.In order for the market to move sustainably higher, we will need to see an improvement in earnings.This can come from three potential catalysts:

Guidance:According to a Duke survey in early December 2019, CEO/CFO pessimism was at its highest level since 2009 and 2002.Both of these periods marked bottoms in the market versus tops.The pessimism was largely attributable to the uncertainty around the trade deal with China.One week later, the Phase 1 deal was signed.Up until last week earnings estimates have held in strong, but the advent of coronavirus has taken a slight shave to the numbers in the past seven days.This is likely a short term blip that the market will look through as greater clarity on the drugs used to cure the virus becomes available. U.S. Dollar:This month the Bank of America Global Fund Manager Survey found that 53% of managers felt the U.S. Dollar

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