Investment Insights: An expected earnings surprise
This weekly report presents insights from our Global Investment Management team.
Financial markets seem to be holding steady and waiting for the next big news headline as stocks continue to fluctuate at heightened levels.
Over the past few weeks, the S&P 500 has ebbed and flowed around its new, record-high 3,000 level, while bond yields have crept lower and lower. The 10-year Treasury yield dipped below 2% earlier this month and closed at 2.08% yesterday. Investors are still trying to decide which direction markets will head as new economic data rolls in and geopolitical events unfold. Corporate earnings are an uncertainty as estimates remain in the negative, but results are looking like they will surprise to the upside.
We are entering the heart of earnings season with over 300 companies reporting their numbers this week and next.
Going into the second quarter, Wall Street analysts were expecting close to a -3.0% decline in earnings, according to FactSet. More recently, those estimates have shifted positively and the new forecast is for a -1.9% decline.
As we have previously mentioned, analyst estimates are typically more bearish though S&P 500 companies have beat earnings by an average of 4.8% over the last five years. Currently, 135 companies have reported, according to Bloomberg data. Earnings have grown by 3.24% and are beating estimates by 4.86% – just above that five-year average. If the trend continues, the second quarter might be able to eke out a marginally positive growth number, but that may not be enough to satisfy investors.
A “no-deal” Brexit may have become a little more likely after yesterday. Boris Johnson won the vote to become the next U.K. Prime Minister and refueled anxiety around an exit from the European Union due to his comments about renegotiating the Brexit deal – something EU officials have already dubbed a “take it or leave it” scenario. The British pound fell on the news; however, the U.K. stock market was little changed as investors chose to wait and see how the newly appointed leader handles the landmark divorce from the EU ahead of the October 31 deadline.
Progress is being made across the geopolitical spectrum with the U.S. avoiding a government shutdown triggered by reaching its debt ceiling, and the U.S. and China getting closer to the trade war negotiating table. However, issues such as Brexit and civil unrest in numerous countries continue to cause investor unease. In addition, a rate cut by the Fed at their meeting next week may not be enough to deter the recent trend in disappointing economic data. In our strategies, we have reduced exposure to U.S. small and mid-sized companies and reinvested into bonds and alternatives, which we believe will reduce overall risk and better position our clients for the landscape ahead.
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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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