For several weeks I’ve been reporting on the market’s attempt to surpass its previous high point set in September 2018.
First, it reached a high when reinvested dividends are included even as the index itself remained slightly underwater. Then, it reached a new closing high but not yet an intraday high. This past week, the S&P 500 index which represents the majority of the U.S. stock market capitalization, and is tracked by the C Fund, has achieved both a new all-time closing high and an all-time intraday high.
The average price-to-earnings ratio of the S&P 500 is back up to 22x, which is somewhat elevated compared to the historical average. The U.S. stock market continues to trade for much higher valuations relative to the fundamentals of its companies (earnings, sales, book value, dividends, etc.) compared to most other international markets.
Earnings season is winding down, and results were pretty good overall.
Read More: Corporate Earnings Season and the C Fund
As the following inflation-adjusted chart shows, the total earnings of the S&P 500 are at record highs:
Fundamental growth has contributed a significant share of recent market performance. Over the past two years, the revenue of the S&P 500 has grown at about an 8% compounded annual rate. This is the core growth; how much actual products and services the companies are selling in dollar terms.
And then on top of that core fundamental growth, corporate tax cuts have boosted net earnings over the past year and low interest rates have allowed for significant share buybacks to boost per-share earnings metrics as well. So, per-share net earnings for the S&P 500 have grown at about a 16% compounded annual rate over the past two years.
April Jobs Report
One of the biggest pieces of financial news last week was the release of the April jobs report. Polled economists were expecting an average of about 190,000 new jobs for the month but the number came in higher than expected at 263,000.
Additionally, because some people left the job market, the unemployment rate reached a 50-year low of just 3.6% even though the overall labor participation rate (the percentage of adults that work, period) dipped from 63.0% to 62.8%.
This chart shows the sectors where jobs were created and lost in April:
Professional and business services, education, healthcare, hospitality, construction, and government led the job growth this month while retail has continued to be a drag.
The following chart shows cumulative job changes over the past 4 years, which also indirectly shows which stock sectors have been doing good or bad lately:
The number of overall jobs grew by almost 4% since January 2017, led by computer programming, health care, and other professional and business services.
The manufacturing workforce has increased by about the same rate, but in recent months is showing a sharp decline led by the auto industry.
The weak spot has been retail, which has seen a 7% workforce decline during this period. Online retail, automated check-out, and other digital solutions have continued to erode the demand for brick-and-mortar retail workers.