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Will record for US shares signal a rally or a sell-off?

Ed Monk

Ed Monk - Fidelity Personal Investing

The all-important US stock market stands on the brink of a new record level heading into a big week with giants like Alphabet, Apple, ExxonMobil and Kraft Heinz set to report in the coming days.

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The S&P 500 fell just short of its record close on Friday but hopes are high that good news on earnings will help the index edge into new territory. 

American shares have been given a leg-up by the Federal Reserve, which is widely expected to cut rates on Wednesday in an attempt to head off a slowdown in the economy. There’s also the prospects of the first stages of a trade deal between the US and China being signed.

But it’s earnings that should be of most interest to investors. The performance of stock markets will rise and fall on macro-economic concerns, of course, but over the long run they are dictated by the performance of the businesses within them. As at the end of last week, some 48% of the S&P 500 (by market cap) had reported results and according to analysis by Credit Suisse, earnings are 4.8% ahead of expectations with 73% of companies exceeding profit estimates.

This adds weight to the case that the US economy, although showing signs of weakness, is still in decent shape - particularly if the possibility of damaging trade tariffs recedes. The latest strong run for its stock market includes outperformance by smaller companies versus larger companies, a reversal of the medium-term trend which suggests many of those areas of the market which have been undervalued for a long time could be in line for a recovery. 

The new record high underlines that 2019 has been a strong year for stock market investors, albeit one that started immediately after a nasty sell off at the end of 2018. The US market dwarves all others and any properly diversified investor will have a heavy weighting to it.

Given its high level, some investors will be wondering whether now is a good time to reduce their equity exposure in anticipation of a correction in prices. Those doing so should proceed with caution. Timing markets in this way may lead to great results (although history would suggest very few people manage to do it effectively) but it certainly makes for a more nerve-wracking ride for investors. By staying invested at times like these you are committing to weathering those falls when they come, but you also get any late-stage boost to prices that may come. With businesses performing ahead of expectations and the global environment improving, market fundamentals appear healthy.  

If falls do come, they will merely represent the inevitable flip-side of the gains we have seen this year - if you cannot stand the thought of any losses to the value of your portfolio ever, investing probably isn’t for you.

I was reminded recently of the following phrase from Peter Lynch, manager of the giant Magellan Fund at Fidelity in the US for 13 years: “Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.”

Important information

The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates.  Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.

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