Early Earnings Releases Boost Equity Markets
Sources: Sources for data in tables: Equity Market and Fixed Income returns are from JP Morgan as of 07/19/19. Rates and Economic Calendar Data from Bloomberg as of 07/19/19. International developed markets measured by the MSCI EAFE Index, emerging markets measured by the MSCI EM Index. Sector performance is measured using GICS methodology.
Global equity markets, for the most part, finished in negative territory last week. In the U.S., the S&P 500 Index, Dow Jones Industrial Average, and NASDAQ Composite retreated 1.21%, 0.61%, and 1.18% respectively. Overseas, developed markets lost 0.13% while the lone bright spot could be found in emerging market returns, which advanced 0.76%. In fixed income, the 10 year U.S. Treasury yield finished at 2.05%, 7 basis points lower than the previous week.
Central bank news will likely take a back seat this week as we head into the quiet period ahead of the Federal Reserve’s July meeting, where it is all but certain a rate cut is on the way. Instead, investors will be focused on a slew of corporate earnings announcements and a few key economic data releases. We will be closely monitoring second quarter company earnings releases, information as it relates to how trade issues have impacted earnings, as well as the overall tone for forward guidance. As of Monday morning, we’re largely encouraged by the results as 16% of the companies in the S&P 500 have reported results with 79% beating earnings estimates and 62% coming in higher than their respective revenue expectations according to FactSet. Notably on the day, technology shares led the pack as companies such as Micron Technology and Apple received analyst upgrades and target price increases. Positive results and optimistic sentiment spilled over into Tuesday morning as evidenced by major U.S. indexes opening the day in positive territory.
Despite the early beats, some investors have been concerned that an overall earnings decline may still take place for the second quarter. We’re not convinced that this will be the case, or even that a small decline would be detrimental to the markets as we believe earnings, and the economy overall for that matter, will indeed exhibit growth through 2019, albeit at a slower pace than was realized during 2018.
It’s our belief that the existing tailwind of corporate earnings, a confident consumer and a strong labor market will help offset the prevailing headwinds of geopolitical risk and slowing global growth. As it stands, the current forward price-to-earnings (Forward PE) ratio of the S&P 500 Index is nearly identical to its 10 year historical average, at roughly 17.9. The aforementioned tailwinds when combined with current valuations and a dovish-leaning Federal Reserve may help to provide stock investors with more than just marginal gains over the course of the second half of 2019.
There are many different factors that may affect the performance of an investment portfolio and we continue to encourage investors to stay disciplined and work with an experienced financial professional to help manage their portfolios through various market cycles within a well-diversified framework that is consistent with their objectives, time-frame and tolerance for risk.
Investing in foreign securities presents certain risks not associated with domestic investments, such as currency fluctuation, political and economic instability, and different accounting standards. This may result in greater share price volatility. These risks are heightened in emerging markets.
There are special risks associated with an investment in real estate, including credit risk, interest rate fluctuations and the impact of varied economic conditions. Distributions from REIT investments are taxed at the owner’s tax bracket.
The prices of small company and mid cap stocks are generally more volatile than large company stocks. They often involve higher risks because smaller companies may lack the management expertise, financial resources, product diversification and competitive strengths to endure adverse economic conditions.
Investing in commodities is not suitable for all investors. Exposure to the commodities markets may subject an investment to greater share price volatility than an investment in traditional equity or debt securities. Investments in commodities may be affected by changes in overall market movements, commodity index volatility, changes in interest rates or factors affecting a particular industry or commodity.
Products that invest in commodities may employ more complex strategies which may expose investors to additional risks.
Investing in fixed income securities involves certain risks such as market risk if sold prior to maturity and credit risk especially if investing in high yield bonds, which have lower ratings and are subject to greater volatility. All fixed income investments may be worth less than original cost upon redemption or maturity. Bond Prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline of the value of your investment.
MSCI- EAFE: The Morgan Stanley Capital International Europe, Australasia and Far East Index, a free float-adjusted market capitalization index that is designed to measure developed-market equity performance, excluding the United States and Canada.
MSCI-Emerging Markets: The Morgan Stanley Capital International Emerging Market Index, is a free float-adjusted market capitalization index that is designed to measure the performance of global emerging markets of about 25 emerging economies.
Russell 3000: The Russell 3000 measures the performance of the 3000 largest US companies based on total market capitalization and represents about 98% of the investible US Equity market.
ML BOFA US Corp Mstr [Merill Lynch US Corporate Master]: The Merrill Lynch Corporate Master Market Index is a statistical composite tracking the performance of the entire US corporate bond market over time.
ML Muni Master [Merill Lynch US Corporate Master]: The Merrill Lynch Municipal Bond Master Index is a broad measure of the municipal fixed income market.
Investors cannot directly purchase any index.
LIBOR, London Interbank Offered Rate, is the rate of interest at which banks offer to lend money to one another in the wholesale money markets in London.
The Dow Jones Industrial Average is an unweighted index of 30 “blue-chip” industrial U.S. stocks.
The S&P Midcap 400 Index is a capitalization-weighted index measuring the performance of the mid-range sector of the U.S. stock market, and represents approximately 7% of the total market value of U.S. equities. Companies in the Index fall between S&P 500 Index and the S&P SmallCap 600 Index in size: between $1-4 billion.
DJ Equity REIT Index represents all publicly traded real estate investment trusts in the Dow Jones U.S. stock universe classified as Equity REITs according to the S&P Dow Jones Indices REIT Industry Classification Hierarchy. These companies are REITs that primarily own and operate income-producing real estate.