Earnings Season Gets Underway
Sources: Equity Market and Fixed Income returns are from JP Morgan as of 7/14/17. Rates and Economic Calendar Data from Bloomberg as of 7/17/17. International developed markets measured by the MSCI EAFE Index, emerging markets measured by the MSCI EM Index. Sector performance is measured using GICS methodology. S&P 500 earnings data from Factset as of 7/14/17.
Stocks shot higher last week as hawkish sentiment from the Federal Reserve combined with disappointing inflation data in the U.S. Domestically, the S&P 500 and Russell Midcap Indexes gained 1.4% each while the Russell 2000 Index moved 0.9% higher. On the international front, Developed Markets finished the week 2.4% higher and Emerging Markets experienced their best weekly performance of 2017 with a 4.6% advance. Emerging Markets are now up over 23% thus far in 2017, outpacing both U.S. and International Developed Markets stocks, which are up 11% and 16% respectively.
Markets have enjoyed steady and synchronized global economic growth this year in addition to low inflation and accommodative central bank policies. This dynamic has helped stocks achieve record levels and has allowed valuations, such as the price-to-earnings ratio, to hover near historical highs. Going forward, we expect valuations to remain in their current range and believe that markets will likely need earnings growth to drive additional gains. With second quarter reporting season now underway, expectations are for sales of S&P 500 companies to grow by 4.8% and earnings to grow by 6.8% on a year-over-year basis. Excluding the Energy sector, which is posting extremely high growth rates relative to last year due to the volatility in oil prices, the Technology sector has the highest expected growth in sales and earnings. Technology generates the most revenue from international sources relative to the other 10 GICS sectors and has benefited from the pick-up in economic growth overseas. Careful attention needs to be paid, however, to the price paid for this level of growth. Consider that the forward price-to-earnings (P/E) ratio for the Technology sector is currently 18.4, a bit higher than the market average of 17.6. This should serve as a reminder that investors need to consider not only the growth prospects of a certain company or industry but the cost of that level of growth.
Bull markets do not necessarily die of old age or high valuations. The length of the current bull market in U.S. equities – 8 years and counting – is likely a result of the positive, yet lethargic, growth that has accompanied the recovery. Intuitively, the slower the recovery, the longer the recovery should take. Similarly, high stock prices do not mean impending doom is on the horizon. Given the state of low interest rates, low volatility, and low economic growth, high valuations can be justified. The key for investors, in our view, is to understand how the economic environment influences and potentially distorts asset prices and to try and adjust for these distortions when making investment decisions. From politics, to technology, to markets, to the economy, many aspects of today’s society are in unprecedented territory. For this reason, one cannot view their portfolio through the same lens used in the past. To learn how we are helping clients navigate these markets, and focus on longer term goals instead of arbitrary benchmarks, please do not hesitate to speak with your Hennion & Walsh Financial Advisor, or a member of the Hennion & Walsh Asset Management Team.
Important Information and Disclaimers
Disclosures: Past performance does not guarantee future results. We have taken this information from sources that we believe to be reliable and accurate. Hennion & Walsh cannot guarantee the accuracy of said information and cannot be held liable. This information is provided for informational purposes only and is not a solicitation to buy or sell any of the asset classes or sectors discussed.
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 REITSs that primarily own and operate income-producing real estate.