The focus on the breakout in U.S. stocks is overshadowing an equally important event: a global stock market breakout. While the U.S. is up roughly 3 percent for the year, the rest of the world is outperforming, including emerging markets, Japan and Europe — up 9 percent, 5 percent and nearly 5 percent year to date, respectively.
What's behind the outperformance? Consider:
What could keep the rally going? Upward revisions in earnings growth, for one, starting with the United States. Bank of America noted that while 2017 guidance from U.S. corporations has been typically tepid since they want to set the bar low, the commentary on conference calls has been far more optimistic — literally. The word "optimistic" was used on a record 51 percent of the calls BofA monitored this quarter, the highest since they began monitoring this data in 2003.
"This optimism could translate into future earnings revisions," BofA wrote.
And Michael Hartnett, chief investment strategist at BofA Merrill Lynch, wrote in a note a couple weeks ago that the reflation trade was far from over. He posits the U.S. has "one last melt-up in risky assets ... what we call the 'Icarus Trade." He says the S&P could go to 2,500 in the first half. (It was starting Tuesday's trading day above 2,300.)
What would stop the rally? For the U.S., it would be a delay or watering down of tax reform, or a sudden hike in March. Like all rallies, it will end when positions are too bullish, profit expectations are too high, and the Fed begins tightening in earnest.
Hartnett's best guess is that may happen sometime in the summer.