S&P 500 on track for biggest recovery since 2009

Wall Street’s most important equity barometer is on track for its biggest annual recovery since the beginning of the bull market, underscoring the sharp turn in investor sentiment following the worst start to a year on record.

The S&P 500 index is poised for an 11 per cent gain in 2016, shaking off a brutal start that at its lowest point in February left it down 10.5 per cent for the year.

Its 21.5 percentage point swing is the widest since 2009 — the year Wall Street emerged from the bear market triggered by the financial crisis.

“We have had a reset,” said Peter Stournaras, a portfolio manager at BlackRock.

The start of 2016 was dominated by fears that the US economy’s recovery from the Great Recession, among the longest expansions since the mid-1800s, had lost momentum. Output growth cooled in the first quarter to an annual pace of just 0.8 per cent.

Unease about the US was compounded by fears over China’s economic growth, along with ructions in the Asian country’s financial market. A sharp decline in the price of crude oil, to just above $26 a barrel, from $61 in mid-2015, deepened Wall Street’s woes.

But since then, the market has undergone a “transition from fears about recession to optimism about reflation”, said David Lebovitz, a global market strategist with JPMorgan.

Corporate America is looking healthier — the S&P 500 snapped a five-quarter profit recession in the third quarter with a 3.1 per cent year-on-year rise in earnings, FactSet data show. Meanwhile, the US economic growth rate picked up to 3.5 per cent in that period, the fastest since 2014.

Wall Street analysts reckon S&P 500 profit growth will accelerate further in 2017, posting a year-on-year pace of 11.2 per cent in first three months of the year, helped by a rebound in earnings among energy companies.

The election of Donald Trump in the US election in November has catalysed the rally in US stocks amid speculation that the businessman’s plans for a vast government spending programme, lower taxes and looser regulations will stoke higher economic growth, inflation and potentially corporate profits.

Investors are also increasingly hopeful that the stronger economic backdrop will allow the Federal Reserve to continue normalising monetary policy after holding rates near historic lows since the financial crisis.

US bank shares have been significant beneficiaries of the post-election march higher, with the sector up by almost a quarter for 2016.

Energy shares, too, have made a stunning recovery, pushing the sector up by 25 per cent in the year to date, as the price of crude oil has moved to the $55 a barrel price range after Opec and other big exporters struck a deal aimed at narrowing the glut of supply on global markets.

Despite the bout of optimism, strategists remain cautious over the outlook for next year, noting that it will be important to see what comes of Mr Trump’s policy proposals, many of which need to be passed by Congress.

“We’ve been told this really nice story but we need to see how it plays out,” said Mr Lebovitz.