The bull market just won't die

The trade war is far from over. Many multinational companies are expected to report weak third quarter earnings. And President Trump continues to feud with the Federal Reserve about interest rates.

The trade war is far from over. Many multinational companies are expected to report weak third quarter earnings. And President Trump continues to feud with the Federal Reserve about interest rates.

Despite all those concerns and negative headlines, stocks are still holding up relatively well. The market took a tumble in August, but stocks have come roaring back in September.

The S&P 500 is now just a little more than 1% below its all-time high from earlier in the year. It has surged nearly 20% in 2019. The Dow and Nasdaq, which are up more than 15% and 22% respectively this year, are inching back toward record peaks too.

Is now still a good time for investors to be buying stocks?

The bull market is getting a bit long in the tooth. It has gone on for more than 10 years with just a few corrections in the past decade to cool things off.

Experts say the market could keep powering ahead. And if you have a long-term goal like retirement, now is definitely not the time to panic and bail on stocks. That said, some companies and sectors may fare better than others for the foreseeable future.

Blue chips with overseas exposure could struggle

Companies with more of a domestic focus should continue to hold up well despite geopolitical jitters, according to data from FactSet.

S&P 500 constituents with more than half their revenue coming from the United States are expected to post a slight gain in third-quarter profits compared to a year ago.

But companies with more than 50% of sales from overseas markets are expected to report a more than 10% drop in earnings versus the third quarter of 2018. Exxon, Disney, Intel, Pfizer and Boeing are just a few of the many multinational companies that analysts currently think will post a double-digit percentage drop in profit this quarter.

The trade conflict is weighing on earnings in several ways, said John Lynch, chief investment strategist of LPL Financial, in a report.

"Slower economic growth hampers revenue, while paying tariffs and dealing with supply chain disruptions hurt profit margins," said Lynch. "Business uncertainty around future trade actions weighs on capital investments, which limits opportunities for companies to grow revenue, particularly industrial and technology companies."

Smaller US-focused companies, as well as firms in sectors like telecom, utilities and real estate that pay higher dividend yields than what investors can get from government bonds, may continue to thrive.

"Several macroeconomic drivers have been fueling the strong outperformance of defensive stocks over their cyclical counterparts," said Alec Young, FTSE Russell's managing director of global markets research, in a report.

Young argued that the biggest factor in favor of defensive stocks has been "widespread fears of slowing global growth which has only been exacerbated by seemingly endless US-China trade tensions."

"This has led companies in defensive, counter-cyclical businesses to lead more economically sensitive stocks," Young added.

The Fed to the rescue again?

That puts the Federal Reserve in the position of needing to act.

Many expect the Fed to come to the rescue — not necessarily because Trump is demanding more rate cuts on Twitter, but because the trade war is taking a toll on the global economy. Lower rates could prop up the economy and reignite earnings growth.

Traders are currently factoring in a 90% probability of a quarter-point cut at the Fed's next meeting on September 18 and another 25 basis point reduction when the Fed meets again on October 30, according to futures tracked by the CME Group. That would leave the federal funds rate at a range of 1.5% to 1.75%. Trump has been calling for rates to go to zero — or even negative.

It's unclear if the Fed will want to get that aggressive. But more rate cuts — by the Fed, as well as the European Central Bank and other global central banks — seem highly likely.

"Our narrative remains that the global economy is slowing with manufacturing bearing the brunt while trade conflict headlines add to the financial market volatility and central banks ease aggressively to offset the economic drag," said Bill Stone, chief investment officer for Avalon Investment & Advisory, in a report this week.

But it doesn't have to be this way. The Fed arguably wouldn't need to cut rates further if the United States and China came to their senses on tariffs and put an end to the trade war.

Julian Emanuel, chief equity and derivatives strategist at BTIG, said in a report that the S&P 500 has a shot of climbing as high as 3,250 by the end of the year — a nearly 9% gain from current levels — but only if the US and China make nice.

Emanuel said that if the US and China "engineer a truce to the Economic Cold War" that would likely boost corporate and consumer confidence, which is "critical to the health of the economy and markets."

"A US/China deal could be the biggest surprise of all," Emanuel said.

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