Investment Insights: What about November?

Wade Balliet
Posted by Wade Balliet
Investment Strategy

This weekly report presents insights from our Global Investment Management team.

While most investors have been focusing on the Fed’s December meeting, markets seem to be ignoring the fact there is actually a FOMC meeting next week. Close up of the Federal Reserve building with the eagle statue

While not being completely overlooked, markets point to just a 17% probability that the Fed will raise rates in November, according to Fed futures data compiled by Bloomberg. Though the double-digit chance is nothing to snicker at, we doubt it even registers on the Fed’s or the market’s radar. Additionally, critics of the Fed have suggested that the committee is motivated by potential political risk-factors rather than economic data when considering a hike in November versus December.

Meanwhile, the market’s view of a move in December resides at a 73% chance; quite the jump from 26% just three months ago. It is clear that not much action, or even unanticipated rhetoric, is expected from the Federal Reserve at next month’s meeting; however, we may see a more well-defined roadmap for rates in December and 2017.

Earnings season is getting into full swing, and it will be an eventful one with almost 180 of the S&P 500’s companies reporting earnings in this week alone. Last week Netflix really “surprised” markets by beating earnings estimates by more than 100% – remarkably, this surprise is actually the second highest reported thus far – with double-digit earnings growth in the last two quarters. Apple was also able to eke out a win over estimates along with positive growth compared to last quarter. Outside of earnings news, mergers and acquisitions activity should see a sharp increase on AT&T’s offer to buy Time Warner for over $85 billion, which will likely be the largest deal of the year – if it goes through. With the expansion in corporate earnings and increased spending activity, the outlook for U.S. companies seems to be improving.

Through market close yesterday, the companies that have reported this season are showing earnings growth of almost 2% and a sales growth number slightly higher than that. While we are hopeful that this quarter could be the first with overall quarterly earnings growth in over a year, there are risks to this view. The energy sector, despite the relative stabilization in oil prices, could continue to drag on earnings growth numbers. The sector has been a key factor in the recent trend of S&P 500 earnings declines with energy being the largest detractor over the past seven consecutive quarters, according to data from FactSet. The same information also shows that if the energy sector was excluded, the S&P 500 would have posted earnings growth in four of the past five quarters.

We continue to anticipate key themes over the near term will be the December Fed meeting and the Italian referendum. The strong climb in the U.S. dollar during this month will likely be a challenge for earnings and economic data in the months to come. As we have reiterated, our strategies remain relatively defensive and will shift as opportunities arise, or as the outlook shows improvement. Risks from abroad, particularly in China where the government is attempting to rein in credit growth and property prices after massive stimulus, may still pose a threat to that outlook.

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