KEY TAKEAWAYS
- The U.S. economy is “insulated” from higher interest rates, which could mean a resilient background as the stock market faces other struggles.
- Earnings growth is expected to grow, but if it stays sufficiently strong the stock market could continue posting strong gains.
Signs that the bull market could be slowing down are all around. Interest rate hikes, surging Treasury yields and the possibility that peak earnings growth could soon be in the rearview mirror all threaten the bull market.
Despite all that, Franklin Templeton has a pet name for the stock market—“honey badger”—that, rather than a bull or bear, is meant to suggest that it can claw its way out of hairy situations much like one of the more fearless carnivores of the animal kingdom.
To be sure, stocks often decline after the Fed starts raising rates. And they tend to show smaller gains after S&P 500 companies post high earnings growth. But the firm believes there’s reason to stay positive, at least in the near term.
Monetary policy usually takes between 12 to 18 months to show its full effect, but this time it could take even longer, because the U.S. economy is “unusually insulated” from higher rates, Jeffrey Schulze, Franklin Templeton’s Head of Economic and Market Strategy, wrote in a recent report. Homeowners locked in low fixed-rate mortgages and many corporations made similar moves with debt when rates were lower in recent years, he said.
Investors may also be worrying about the sustainability of earnings growth, which suggests smaller returns on stocks. Analysts are projecting growth of 32% this year, and 15% next year, according to FactSet.
However, Schulze observed that the magnitude of earnings growth following those peaks mattered more than the peaks themselves. Since 1980, he wrote, the S&P has returned nearly 20% on average in the year after an EPS growth peak when growth holds above 10%; when it falls below that level, index returns drop to just above 6%.