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Has the Stock Market Topped Already?

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Here come the "peak growth" calls. And along with them come the "stock market top" calls. 
Last week in my article Growth Peak on the Horizon I shared some economic and earnings data trends that begin the debate about how soon institutional investors will want to start exiting their long-held equity positions, fat with profits.
After showing the important earnings trend charts for the Technology sector and the broad market in that article, I said this...
At Zacks, we are most focused on Wall Street analyst Earnings Estimate Revisions (EER) because they tell growth's direction and magnitude of change.
And I especially like to look ahead a quarter or two to give me an idea about when institutional investors might be looking to lighten their load of stocks. Since they have large positions, they  need time to sell and they prefer to sell into strength -- in essence, before the growth peaks have arrived and everyone can see it.
Morgan Stanley Throws the Wet Blanket
This week, a major global investment bank decided to chime in on the matter. Here was my post on Twitter as soon as I saw the article on Bloomberg Tuesday morning...
And below is the article link because it is very short and definitely worthwhile, with an added Bloomberg chart on "peak valuations," to understand why the bank's equity strategy team believes that U.S. stocks are near the top, the economic cycle near the end, and valuations past their peak.
Just right click and open the link in a new browser tab so you can read the rest of my argument too...
As if this wet blanket wasn't enough to dampen the spirits of investors, another team at the same bank voiced their concern about limited upside from tax reform.
In my article from last week Growth Peak on the Horizon I showed this graph of the quarterly earnings growth estimates expected for the S&P 500 with the following caption...
Tax Reform Lifts Many Boats: Total S&P 500 EPS Growth
The other Morgan Stanley research note on Tuesday suggested the tax breaks would incentivize a near-term boost in consumption, prompting one journalist to label the effect akin to a rush of ice cream for the economy and stock market.
Here was the excellent summary of the analysis from Steve Goldstein at Dow Jones, who also happened to find that the IMF shared this view...
Sugar high? Two new reports say economic boost from tax cuts may be fleeting
DOW JONES 9:41 AM ET 4/17/2018
Steve Goldstein
Enjoy the economic impact from the tax cuts while you can, because they won't last for long, according to two reports released Tuesday.
Morgan Stanley and the International Monetary Fund put out strikingly similar reports, saying the $1.5 trillion Tax Cuts & Jobs Act will basically give the U.S. a sugar hit.
The Morgan Stanley report -- titled, "The Downside of Fiscal Stimulus" -- is particularly negative. That report argues the benefits of fiscal stimulus are mostly priced in, since the S&P 500 rallied 20% last year and 10-year bond yields rose 45 basis points beginning when tax reform started to look more likely in September. 
The International Monetary Fund makes similar points, perhaps lost beneath its decision to upgrade its U.S. growth estimate for the next two years.
The IMF world economic outlook in particular focuses on the impact of temporarily increasing the investment expensing allowance, and, like Morgan Stanley, the IMF comes away with the idea that growth will be brought forward only temporarily.
(end of Steve Goldstein article excerpts)
Staying Nimble
All of this macro hawkishness about the economy and market are good to keep tabs on. We want to know ASAP when the big money is worried and getting ready to leave the party.
But I don't think it's even last call yet. I think that this doubt creates further opportunities in a cycle that still has 12 to 18 months left.
As I said last week...
This is the risk of investing late in a cycle when interest rates are on the rise, big tax reform is already priced-in, and valuations are in the upper third of historical averages.
The current expansion has already lasted 105 months (since June of 2009) and is about to become the second-longest in U.S. history in 33 business cycles going back to 1854. Right now, only the expansions from March 1991 to March 2001 (120 months) and from February 1961 to December 1969 (106 months) were longer.
Cooker's Bottom Line: I'm not worried about valuations because they are not yet extreme and supported by the growth outlook, peaking or not. I think we've got the economy and earnings on our side to stay invested the rest of this year -- especially if capital investment in Technology stays strong.
But it's also time to be tactical in your buys and sells. The gift of volatility in the weakest six-month period every four years (the dreaded mid-term elections) is that you can still "buy the dips and sell the rips" in your favorite top-ranked stocks.
(end of excerpt from my article last week)
I also indicated last week in my disclosure that I owned shares of Apple (AAPL - Free Report) and Micron for the Zacks TAZR Trader portfolio -- and that after I recently took some profits in Lam Research (LRCX - Free Report) and NVIDIA (NVDA - Free Report) , I could be back in them at any time.
Those buys have transpired as I saw this morning's reaction to Lam's terrific earnings and outlook another good opportunity. I'll write more on LRCX this week, but in the meantime, check out my article from last night on Micron (MU - Free Report) which reiterates the Technology Super Cycle rationale...
Disclosure: I own shares of AAPL, MU, LRCX, and NVDA for the Zacks TAZR Trader portfolio. 
Kevin Cook is a Senior Stock Strategist for Zacks Investment Research where he runs the TAZR Trader service. Click Follow Author above to receive his latest stock research and macro analysis.

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