Markets, Economy

Weekly Kickstart (06/17/2019-06/21/2019)

6/17/19 8:00 AM

iStock-626627280.jpgStocks continued higher last week, as the S&P 500 rose by 0.47 percent to 2,886.98. That left the benchmark index up 15.16 percent 2019-to-date, and just 2.00 percent below the all-time closing high. Trade tensions have dominated the news lately, but the media spotlight will likely shift to monetary policy this week for the Federal Open Market Committee’s big June rates decision. However, another important issue ever present in the minds of investors is the trend in corporate earnings growth. Indeed, the S&P 500 in the first quarter experienced a year-over-year earnings decline of -0.3 percent, according to FactSet, and the estimated earnings decline for the second quarter is -2.5 percent. Domestic-focused firms are expected to have outperformed in Q2, with companies that derive more than half of their sales inside the U.S. projected to enjoy an earnings growth rate of 1.4 percent. Companies that generate less than 50 percent of sales inside the U.S., though, are seen suffering an earnings decline of -9.3 percent.


The trade war might have exacerbated this earnings disparity, but a bigger factor is the relative weakness of most overseas economies when compared to the stronger growth conditions here in America. Regardless, if the overall Q2 forecast is correct then it will mark the first time since 2016 that S&P 500 companies in aggregate have reported two consecutive quarters of year-over-year earnings declines. Some kind of negative year-ago comparison was to be expected considering that earnings growth shot higher after the Tax Cuts and Jobs Act of 2017 lowered the corporate tax rate in America to a more globally-competitive level. Further, even though profit growth contracted in the first quarter it was nowhere near as bad as analysts had anticipated. For example, 76 percent of companies in the S&P 500 reported a positive Q1 earnings per share (EPS) surprise, and 59 percent reported a positive revenue surprise. That EPS beat rate is above the 5-year mean, and companies reported earnings that were an average of 5.3 percent above estimates. Such upside surprises have helped buoy stock valuations recently, and a similar pattern could occur when the corporate earnings season for the second quarter begins next month. However, there are still lots of unknowns (risks) left for the market to overcome in the near-term, all of which could become excuses for traders to take profits (sell) after the latest run-up in prices. Any retail investors unsure how to navigate this possibly volatile environment should consider consulting with a professional financial advisor and as always, we are here to help with any questions you may have.


To recap a few of the things we learned about the economy last week, the positives included that home purchase and mortgage refinance applications soared, small business owner optimism improved, wholesale, household, and trade-related inflation pressures moderated, retail sales growth firmed, industrial production rose, capacity utilization rebounded, total hires lifted to an all-time high, and the number of unemployed Americans per job opening fell to a record low. As for the negatives, consumer confidence cooled, and initial jobless claims ticked higher for the third straight week. This week the pace of economic data slows down considerably but there are still a few important reports on manufacturing and housing scheduled to be released, along with the likely market-moving announcement on monetary policy from the FOMC on Wednesday.


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Sources: Econoday, FactSet, FRBSL

Post author: Charles Couch