Earnings Scorecard – How is the Third Quarter Shaping Up?
Sources: Sources for data in tables: Equity Market and Fixed Income returns are from JP Morgan as of 11/08/19. Rates and Economic Calendar Data from Bloomberg as of 11/08/19. 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 finished higher last week. In the U.S., the S&P 500 Index hit all-time highs finishing the week at a level of 3093, representing a gain of 0.93%. The increase also marks the fifth consecutive weekly advance for the index, the longest streak since February of this year. The Russell Midcap Index returned 0.40% while the Russell 2000 Index, a measure of the Nation’s smallest publicly traded firms, gained 0.63% for the week. On the international equities front, developed and emerging markets also finished positive returning 0.54% and 1.50%, respectively. In fixed income, 10 year U.S. Treasury prices continued to give way to overall economic optimism as their yield increased to 1.94%.
Stocks were lifted early last week by an October jobs report that surprised to the upside as well as news of continued progress between the U.S. and China, in particular, an alleged agreement that some existing tariffs would be rescinded. The sentiment would be tempered a bit on Monday of this week as President Trump commented that negotiations are moving along “very nicely,” but that an agreement has not been reached and tariffs would not be eliminated. Regardless, it seems that some form of progress is being made but that new headlines in this regard are likely to contribute to continued volatility moving forward.
We’re encouraged overall by the direction and clarity that has been provided recently to combat some previously perceived market headwinds, such as trade/tariffs, a no-deal Brexit, and certain recession risks and indicators (ex. an inverted yield curve). These areas of clarity, combined with a dovish-leaning Federal Reserve and a strong U.S. consumer, should provide more upside potential, though likely limited, for stocks as we close out 2019.
Finally, let’s review corporate earnings as we move into the later innings of earnings season. Third quarter earnings have provided validation of our overall “Slowing but Growing” theme and the relative strength and confidence of the U.S. consumer. According to Fact Set, as of November 8, 2019, with 89% of the companies in the S&P 500 having reported results, 75% reported positive earnings surprises and 60% reported positive revenue surprises. Earnings are estimated to decline in the third quarter versus the same period last year. However, companies have thus far reported earnings that are 3.8% above expectations. In terms of revenues, analysts estimate that revenues will be higher in the third quarter versus the same period last year, helped by healthy levels of consumer spending, but hurt by the strength of the U.S. Dollar. This revenue momentum should help carry the economy through the end of the fourth quarter of 2019 and into the first quarter of 2020. We anticipate that revenues, and earnings, will be relatively strong in the fourth quarter of 2019, culminating with a record holiday shopping season – particularly online holiday shopping.
As always, we encourage investors to stay disciplined and work with experienced financial professionals 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.
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