The market melt-up took a pause last week, as the S&P 500 fell by 0.25 percent to 2,833.28. That left the benchmark index up 5.97 percent year-to-date, and just 1.38 percent below the record close. Despite the slight uptick in volatility, major indices are still sitting on large quarterly gains, and a key reason why many investors have been able to look past a hawkish Fed and constant trade war saber rattling is the strong corporate earnings environment. Indeed, 91 percent of companies listed on the S&P 500 have reported their profit results for the second quarter of 2018, according to updated FactSet data. Seventy-nine percent of those firms have beat their average earnings per share (EPS) estimate, and 72 percent have beat their mean sales estimate. The former puts Q2 on track to be the best quarter for positive EPS surprises since FactSet began tracking this data in 2008. At the sector level, the Telecom, Healthcare, and Information Technology arenas have the highest percentages of companies reporting earnings above estimates, while the Energy sector has the lowest percentage of firms beating estimates. More importantly, all eleven sectors are reporting year-over-year earnings growth, including ten sectors that are reporting double-digit growth (led by Energy, Materials, and Information Technology).
Looking ahead, though, analysts project earnings growth to continue at about 20 percent through the remainder of the year before starting to slow in 2019. One reason for the negative outlook is that recent tax reform has been a major factor behind 2018’s above-trend profits, and the boost could fade over time depending on how firms utilize their tax savings. Further, some businesses already appear to be providing excuses for weaker earnings growth down the road. For example, there has been a lot of uncertainty surrounding U.S. trade policy recently, and the number of companies citing “tariffs” in their post-earnings conference calls now surpasses the number of firms mentioning “tax reform.” Rising input costs, such as raw materials and labor, provide another potential headwind for earnings growth, but many analysts are hopeful that a robust U.S. economy and healthy consumer and business spending will continue to allow prices to increase without significantly hurting demand. Altogether there are clearly a lot of unknowns (risks) that remain for equities, which is why individual investors should continue to focus less on the day-to-day fluctuations in the market, and more on the long-term goal of amassing a large retirement nest egg. Assistance is available through the consistent use of tax-advantaged savings vehicles, dollar-cost averaging, and regularly consulting with a professional financial advisor. 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 consumers’ total revolving (credit card) debt declined, wholesale inflation pressures moderated, the quits rate remained elevated, the number of job openings in America rose to a near-record high, and first-time claims for unemployment benefits held near a half-century low. As for the negatives, mortgage applications fell, small business borrowing cooled, household inflation pressures firmed, and total hires decreased (although this could be another side-effect of a tightening labor market). This week the pace of economic data remains slow but there are still a few important reports on manufacturing, housing, consumers, productivity, and small business scheduled to be released.
**A more detailed snapshot of the U.S. economy can be found here.**
What To Watch:
- Nothing significant
- MBA Mortgage Applications 7:00 AM ET
- Retail Sales 8:30 AM ET
- Empire State Mfg Survey 8:30 AM ET
- Productivity and Costs 8:30 AM ET
- Industrial Production 9:15 AM ET
- Business Inventories 10:00 AM ET
- Housing Market Index 10:00 AM ET
- EIA Petroleum Status Report 10:30 AM ET
- Housing Starts 8:30 AM ET
- Jobless Claims 8:30 AM ET
- Philadelphia Fed Business Outlook Survey 8:30 AM ET
- EIA Natural Gas Report 10:30 AM ET
- Consumer Sentiment 10:00 AM ET
- E-Commerce Retail Sales 10:00 AM ET
- Baker-Hughes Rig Count 1:00 PM ET
Sources: Econoday, FactSet, FRBSL
Post author: Charles Couch