It was a wild ride in the stock market during the first 3 months of the year. January started out with one of the biggest drops ever for the month. The market continued to decline into mid-February reaching about a -10% decline for the year at that point before essentially recovering all the ground it had lost by the end of March. European and Asian stock markets were down about -2.5% on average for the quarter and U.S. and overseas bonds were generally up between 1% and 2.5%. Since the end of March, the U.S. market has edged up slightly.

While the U.S. economy has continued to show some improvement there remain a number of areas of concern. Most pertinent to the stock market is the trend of lower corporate earnings over the last two years. Earnings were down -0.6% in 2014 and down -5.1% in 2015. And those lower earnings numbers may actually be overstated due to financial engineering by companies as well as companies buying back their own stock. The result is that – with the recent gains in stock prices –  the S&P 500 index is priced about 20% above the average price-to-earnings ratio for the last 10 years. This all makes stocks a less desirable investment option at current prices.

Stocks have enjoyed tremendous tailwinds such as record-low borrowing costs, low wages, significant merger and acquisition activity, record margin debt used to buy stock, and corporate stock buybacks. Many of these tailwinds are abating or even becoming headwinds. For instance, after the Federal Reserve raised interest rates for the first time in almost 10 years in December, the stock market dropped considerably until its mid-February turn around. And one likely reason for the turnaround was the Federal Reserve backing away from additional rate increases for the time being.

Low interest rates have provided significant support for stock price increases over the last 7 years. But if earnings continue declining, low rates won’t be enough.