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Strong Earnings Season, French Election Reasons for Investor Optimism

Another strong earnings season has been one of many factors boosting the stock market of late. How long can the rally last?

The first-quarter earnings season that is just winding down was not one that many investors had been looking forward to. As the season started, investors knew that the stock market was expensive by historic standards, with prices at more than 18 times 2017 earnings.

The final word on first-quarter earnings season hasn’t been written, although I can almost hear the bean counters who watch over the markets tapping away at their keyboards as I write. But summaries of results halfway through the process were generally quite strong. A ton of big names reported results that beat guidance on revenue and earnings, which is good. Even better, a majority of companies either affirmed their full-year guidance or raised it.

Aside from earnings season, there is the usual menu of headlines, many of them generated by writers who know that being an alarmist and a catastrophist is the best way to get their stories clicked on. But there’s not too much to worry about there.

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Results from the French election were a major calming influence, not because investors are so taken with the untried centrist Emmanuel Macron, but because his opponent, Marine Le Pen, had promised to take France out of the European Union. And that kind of seismic disruption of a major global marketplace had economists lying awake at night in a cold sweat.

The current spate of headlines about the firing of FBI Director James Comey isn’t helping, of course. While investors may have their own private feelings, the practical outcome of this most-recent controversy is that meaningful progress on health-care reform and tax reform is going to be more difficult. And those two issues will have a much bigger impact on the U.S. economy than any political wrangling, at least for now.

For growth stock investors, there is still plenty to be optimistic about. The global economy appears to be gathering strength. Yes, growth is slow, but it is steady. And slow growth has lowered the probability of multiple interest rate increases this year from the U.S. Federal Reserve Board.

Most important of all, the major stock indexes are hitting new highs, which tells growth investors that optimism is the order of the day. Here’s a daily chart of the Nasdaq Composite, which shows the post-election rally, the nine-week consolidation that followed and the strong three-week uptrend that has lifted it to all-time highs.

Earnings season has helped push the Nasdaq to all-time highs.

Even the Dow Jones Industrial Average, which has been trading sideways since the beginning of March, is refusing to give up its gains. The relationship between the more conservative Dow and the growthier Nasdaq is a good indicator of how investors are really feeling. And right now, they have an appetite for risk, which is a good sign for growth investors.

Growth investors are generally optimistic by nature. But when there is this much positive evidence, being optimistic is just a rational decision. Deciding to run with the bull while it’s on the run is a great choice.

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Paul Goodwin is a news writer for Cabot’s free e-newsletter, Wall Street’s Best Daily.