Investment Insights: Will earnings take the driver’s seat?
This weekly report presents insights from our Global Investment Management team.
After an extensive decline in the last quarter of 2018, U.S. stock markets are bouncing back and are nearing record levels.
The S&P 500 is now up over 16% in 2019 after a stellar first three months of the year – the best performing quarter since 2009 – and the index is just 30 points away from its all-time high per Bloomberg. While economic data has been fairly resilient, our team is anticipating more tempered results.
The Bank of the West Economics team also commented on a notable run-up in business inventories, which added to GDP in the first quarter but may end up detracting from growth in the coming months. Outside of economic data, part of that gain in stocks can be attributed to an overblown sell-off, and also to an increasingly dovish Federal Reserve, moderated expectations for earnings, and optimism over a U.S.-China trade resolution.
We have continued to reference the outstanding earnings experienced in 2018, but also how difficult it will likely be for companies to markedly exceed those numbers given the fading of tax cut effects and increasing headwinds facing corporations. Earnings season for the first quarter begins in earnest this week, but it is still entirely too early to tell what direction results will go. Bloomberg data is showing numbers for just six companies so far, reflecting earnings that are almost 3% lower than expectations. Keep in mind, Wall Street analysts have already acknowledged potentially lower profits along with company guidance, and have lowered expectations accordingly. According to FactSet, the market is projecting a decline in earnings of 4.3% this quarter, and essentially flat growth next quarter.
Earnings remain a key driver for stocks, but no one can deny the optimism over a potential new U.S.-China trade deal and its predicted positive effect on markets. While the timing of an official end to the trade dispute remains uncertain, representatives have publically commented that the negotiations have reached their “final round of concluding issues,” according to U.S. Treasury Secretary Steven Mnuchin. Officials have also touted an agreement over enforcement mechanisms when discussing intellectual property theft and forced technology transfers, saying the deal far exceeds any previous agreements to open China’s markets to American companies.
Our team sees the recent climb in stocks may be a profit-taking opportunity in select exposures and for our clients’ unique situations. While a trade deal between the U.S. and China would be a significant positive factor, some of that may already be priced into markets, and the outlook for earnings and economic data has become increasingly concerning. Even the new October 31 Halloween deadline for Brexit may not end up being much of a positive given the lack of renegotiation options and potential for instability within the British government. A combination of different downside risks have led to a market sentiment that’s a little unsettling in light of those risks versus potential rewards.
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