Investment Insights: Reaching the endgame

Wade Balliet
Posted by Wade Balliet
Investment Strategy

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

“Better than expected” is the expression that keeps coming to mind for investors as the first quarter earnings season continues to beat forecasts.

The S&P 500 is back to hitting new record highs almost daily and has gained an astounding 18.25% in the first four months of 2019. Powerhouse earnings, an increasingly dovish Federal Reserve, and optimism over a potential end to the U.S.-China trade war are just some of the factors driving markets upward.

As stock markets earn the spotlight, bond markets are also quietly gaining. While these markets typically move in opposite directions over longer periods, there seems to be a current disconnect in expectations between stock and bond investors. The benchmark 10-year Treasury yield has shied away from the almost 3.25% we saw late last year, and has declined throughout 2019 to 2.46%. Bond markets seem to be anticipating a more challenging environment ahead, but that hasn’t deterred stock markets from enjoying the most recent earnings party.

The resilience of this earnings season continues to pleasantly surprise investors. So far, 313 companies of the S&P 500 have reported earnings. Bloomberg data shows that corporations are actually beating earnings estimates by more than average, and continue to do so at a slightly higher than average rate with around 76% of companies beating their estimates. Additionally, the actual growth of earnings is up around 1.63% compared to expectations that profits would shrink.

The most recent report from FactSet, which combines actual earnings results with Wall Street’s expectations for companies that have yet to report, maintains that companies will end up with lower profits of about -2.3% on average. Lower expectations have put some companies in position to really outshine expectations. General Electric and Amazon both beat profit estimates by over 50%, while companies like Anadarko Petroleum and Twitter saw profits more than double what Wall Street expected. Besides an official end to the U.S.-China trade deal, the Fed may be an added support for a further rally in stocks.

The Fed will conclude its third meeting of 2019 today, just after the release of its preferred inflation gauge, the personal consumption expenditure deflator, and following the most recent round of trade talks between the U.S. and China in Beijing. Despite a strong GDP reading in the first quarter, the Fed may point to timid inflation and a weakening in select economic data as its reasons for holding steady on rates and its outlook. Ahead of the meeting, Bloomberg futures data showed a zero percent chance of a hike at this meeting and the remainder of 2019, while the probability of an interest rate cut grew to 67% by year-end. Officials left rates unchanged and repeated their focus on being “patient” in the current environment, but gave no clear indication whether a cut or hike is more likely at their meeting in June.

The Global Investment Management team has become wary of the state of financial markets even as year-to-date returns reach close to 20% for U.S. stock markets and into the mid-teens for international markets, according to MSCI data. We may be approaching an endgame when it comes to this market cycle, and cracks are becoming more apparent as we dig into economic data, which on its surface may seem positive. Earnings results will continue to be closely monitored as the possibility for profits shrinking this quarter remains credible. Our team will continue to seize profit-taking opportunities like our recent reduction in select stock sectors, which take advantage of the recent run-up, but also reduce risk in our strategies.

For direct access to investment insights, market updates, and perspectives on financial topics from Bank of the West and BNP Paribas leaders, download the Voice of Wealth app, available at the Apple iTunes and Google Play stores.

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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.

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