Kick Off to Earnings Season
Sources: Equity Market, Fixed Income and REIT returns from JP Morgan as of 04/08/16. Rates and Economic Calendar Data from Bloomberg as of 04/11/16.
U.S. stocks* reversed trend last week, falling 1.2% as investors took profits and “batten down the hatches” ahead of Q1 earnings season. International stocks posted mixed results with developed markets* advancing 0.7% and emerging markets* falling 1.1%.
Now that the wild market swings of the first quarter are firmly in the rearview mirror, investor focus is now shifting to the start of earnings season, which was “officially” kicked off Monday night with Alcoa’s (Ticker: AA) announcement. The aluminum producer beat on bottom line earnings while missing on top line sales, a trend that has persisted over the past few years as companies focus on cost cutting and margin expansion to drive earnings per share (EPS) higher. In aggregate, companies in the S&P 500 index are expected to announce a contraction in earnings of 9.1% during Q1. If earnings do contract, it will represent the fourth quarterly contraction in a row, a streak that hasn’t happened since the recovery from the most recent financial crises started.
At the start of the quarter, earnings were actually expected to grow by 0.7% this quarter but due to downward revisions in all ten sectors, the worst year-over-year decline since Q1 2009 is now expected. Considering earnings more often than not surprise to the upside, this earnings season could set the table for gains in the stock market during the second half of the year. Higher (than expected) Q1 earnings will help to justify the current forward looking Price to Earnings (P/E) ratio of 16.7 and “price” the market more fairly, providing a positive catalyst to propel stock prices higher.
To be clear, we are not expecting U.S. stocks to gain much more by the end of 2016. In light of the current stage of the business cycle, low single digit returns would be welcomed in this asset class. We do expect market leadership areas to change over the course of 2016. For example, we believe that opportunities do exist for investors who are appropriately diversified and have allocations to international stocks. We believe that international stocks, in fact, will outperform U.S. stocks in 2016 and we stress the need to incorporate them into a long term growth portfolio. International stocks do possess different risk considerations than U.S. equities and we encourage investors to work with a professional when building an internationally diversified portfolio. To learn more about how Hennion & Walsh accesses international markets and the countries we are focused on, please do not hesitate to speak with your Hennion & Walsh Financial Advisor or a member of the Hennion & Walsh Asset Management Team.
*U.S. Stocks are represented by the S&P 500 Index. Developed Markets are represented by the MSCI EAFE Index. Emerging Markets are represented by the MSCI EM Index. Earnings expectations from Fact Set.
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.
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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.
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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.