US stocks closed higher on Friday, led by strong tech gains following Netflix’s upbeat earnings report.
The S&P 500 rose 0.3% and the Dow finished slightly higher, both marking a fresh record, while the Nasdaq 100 gained 0.7%.
Also, Shares of Apple rose 1.2% after an industry report showing a surge in China iPhone sales.
Nvidia (0.7%), Amazon (0.7%) and Alphabet (0.3%) also finished in the green.
However, Procter & Gamble was slightly lower after missing sales expectations, and American Express dropped 3.1% due to lower-than-forecasted revenue.
The stock market is being powered by accelerating economic growth and falling short-term interest rates. S&P 500 consensus earnings are forecast to be up 15% next year. Historically, the unwind of high inflation and high interest rates in the absence of recession has been supportive of S&P 500 appreciation.
The major banks kicked off earnings season last week; Bank of America, Charles Schwab, Citigroup, Goldman Sachs, Morgan Stanley, BlackRock, JPMorgan Chase and Wells Fargo reported better-than-expected results and traded higher.
The S&P 500 financials ETF (XLF) is up 4.5% from the open last Friday. Given a primary ingredient for economic growth is easy money, strong bank reports imply there is continuing financing for growth.
Most companies in the United States have non-investment grade debt ratings. The relative cost of borrowing is measured as a “spread” between short-term U.S. treasury rates and high-yield borrowing rates. This spread is near 20-year lows. Lenders perceive the risk of lending (credit risk) as low and are making access to capital inexpensive. This is bullish.
Although many foreign equity markets are less expensive than the S&P 500 on a Price/Earnings (P/E) basis, the U.S. financial markets are attracting global investors at a record level. Foreign investment in the U.S. is both an endorsement of the strong innovation and growth in the U.S. and a buying pressure for the U.S. stock market.
The negative overhang on the S&P 500 is high valuation. The forward 12-month P/E is roughly 22x versus a 30-year average of 16.7x. As earnings season progresses, what we may find is the earnings expectation is too low and is revised higher - higher earnings lowers the P/E making the current valuation more attractive.