News Analysis: Dow breaks 24,000, experts cautiously optimistic about U.S. equities

by Xinhua writers Wang Wen, Sun Oumeng

NEW YORK, Nov. 30 (Xinhua) -- The Dow Jones Industrial Average broke above the 24,000 mark and the S&P 500 closed at a record high on Thursday, triggering another round of debate on whether the U.S. stock market now has higher-than-normal risks.

On Thursday, the Dow rallied 331.67 points, or 1.39 percent, to 24,272.35. The S&P 500 rose 21.51 points, or 0.82 percent, to 2,647.58. The Nasdaq Composite Index was up 49.58 points, or 0.73 percent, to 6,873.97.

The blue-chip Dow has crossed five similar 1,000-points so far this year, on the back of strong corporate earnings, robust economic data and hopes that Trump's tax reform plan will be pushed forward.

Experts said stocks surged on the day mainly because investors had high expectations that Republicans were on the verge of the biggest tax code overhaul in about three decades.

The U.S. Senate Budget Committee on Tuesday approved the Republican tax bill to overhaul the U.S. tax code, sending it to the Senate floor for a vote.

Republicans previously hoped they could pass a plan by late Thursday or early Friday, but were forced to delay voting after a setback. The next roll call votes was set for 11 a.m. (1600 GMT) on Friday.

Earlier Thursday, Republican Senator John McCain said in a released statement that he had decided to back the tax bill.

"I believe this legislation, though far from perfect, would enhance American competitiveness, boost the economy, and provide long overdue tax relief for middle class families," said McCain in the statement. His support provided new momentum for the legislation.

The robust domestic economy also boosted investor confidence, as experts pointed out.

U.S. real gross domestic product (GDP) increased at an annual rate of 3.3 percent in the third quarter of 2017, according to the "second" estimate released by the Commerce Department Wednesday. The figure was higher than the market expectation of 3.2 percent.

U.S. personal income increased 65.1 billion U.S. dollars, or 0.4 percent, in October, the Commerce Department said Thursday.

In October, disposable personal income increased 66.1 billion dollars, or 0.5 percent, and personal consumption expenditures increased 34.4 billion dollars, or 0.3 percent.

Experts have noted different factors behind each time when the Dow reached a milestone.

"While investor optimism early in the year focused on the new presidential administration's plans for tax reform, infrastructure spending and deregulation, the more recent exuberance finds support in growing corporate earnings, a strong international backdrop and a steady dovish stance by the Fed," Humberto Garcia, head of global asset allocation for Bank Leumi USA, told Xinhua.

Third quarter earnings and revenue are expected to increase 8.3 percent and 5.4 percent, respectively, year-on-year, according to Thomson Reuters' latest statistics.

Of the 489 companies in the S&P 500 that have reported earnings to date for the third quarter of 2017, 72.2 percent have reported earnings above analyst expectations. This is above the long-term average of 64 percent and in line with the average over the past four quarters of 72 percent, according to Thomson Reuters.

In the long term, whether U.S. stocks are seeing higher-than-normal risks and whether the valuation is too high have been hotly debated topics for some time.

Some analysts have seen warning signs from the combination of high equity valuations and low and falling fixed income yields.

The fund giant Vanguard Group said in its latest research that there is a 70 percent chance of a U.S. stock market correction.

It also revealed its investing outlook last week, telling investors to expect no better than 4 percent to 6 percent returns from stocks in the next five years, according to media reports. This is Vanguard's least bullish outlook since the post-financial crisis recovery began.

Other experts are cautiously optimistic about U.S. equities in the near future.

Garcia said the high equity valuation and low and falling fixed income yields do suggest mispricing somewhere but a soft landing from high leverage is possible.

"(It) is possible if rising interest rates do not force rapid selling to adjust to margin requirements, as might happen were the Fed to embark on a rapid sequence of rate hikes," Garcia said.

But he added that all signals show that Jerome Powell, President Donald Trump's pick to lead the Federal Reserve, intends to keep to the slow moving, a supportive stance that the Fed has held in recent years. Enditem