Investment Insights: Into the straightaway
This weekly report presents insights from our Global Investment Management team.
After some choppy trading, the S&P 500 Index jumped back to near-record highs on Friday as the new administration began to review and possibly ease financial regulations, and as earnings results rolled in.
As of Wednesday morning, 318 of the 498 companies in the S&P 500 Index have reported for this season and earnings look to be notably strengthening. So far, earnings have grown by 4.86% and sales rose 4.28% when compared to last quarter, according to Bloomberg. Quarterly sales have met but not really exceeded analyst expectations, while earnings have topped predictions by just over 3.5%. Unsurprisingly, the energy sector beat projections by the highest margin, as oil prices reclaimed ground in the last few months of 2016.
Economic data is also adding to a rosier outlook. While the GDP data reviewed last week left more to be desired, employment in the U.S. continues to improve, with the most recent report showing job growth handily beating economists’ forecasts. That improvement coupled with the expectation of a reflationary ignition, which could potentially be fueled by recovering growth and potential infrastructure spending, will be important inputs to Federal Reserve policy this year. As such, our colleagues in the Bank of the West Economics team expect a marked uptick in inflation, forecasting headline CPI to reach 2.5% by the end of 2017. The Fed kept rates steady at its meeting last week but could hike multiple times this year. Yellen and company seem to be starting to apply the brakes, which may be warranted if current trends continue.
Investors may be asking the European Central Bank (ECB) to put on the brakes soon, too. Inflation expectations for the Eurozone seem to be on a steady advance, and questions are being raised over the central bank’s policy path and when tapering of the ECB’s mammoth quantitative easing program will begin. In the U.K., Parliament voted by a vast majority to approve the Article 50 bill, which will likely be triggered by the end of March. Theresa May and her administration released a more detailed plan on how Britain will leave the European Union via a white paper that included language on adjustments to trade, immigration, and the sovereignty of Britain.
Earnings will likely be a primary driver for equity returns this year, but there are downside risks given valuations, particularly in the U.S. Uncertainty persists in the markets, as investors scrutinize the actions and potential actions of the Trump administration. Internationally, tapering in Europe and Japan could potentially exacerbate rate moves domestically. China remains a potential risk – as such, the country’s economic data and fiscal policy will be closely monitored. A period of consolidation is likely over the shorter term, but we believe medium-term fundamentals are positive.
Investing involves risk, including the possible loss of principal and fluctuation in value. Economic and market forecasts reflect subjective judgments and assumptions, and unexpected events may occur. Therefore, there can be no assurance that developments will transpire as forecasted. The information in this newsletter is for informational purposes only and is not intended to be investment advice or a recommendation. Nothing in this newsletter should be interpreted to state or imply that past results are an indication of future performance.
Fixed income securities are subject to interest rate, inflation, credit and default risk. The bond market is volatile. As interest rates rise, bond prices usually fall, and vice versa. The return of principal is not guaranteed, and prices may decline if an issuer fails to make timely payments or its credit strength weakens.
International securities involve additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability. These risks are greater in emerging markets.
Diversification and asset allocation do not ensure a profit or guarantee against loss.