Markets, GDP and Corporate Earnings on August 1, 2016
Written by Rick Welch on August 1, 2016
This report is written as an executive summary of recent market, GDP and corporate earnings data. If you have any questions or would like some additional information, please contact Rick Welch at (215) 603 2976 or rickwelch@academywealthadvisers.com.
Markets – After the Brexit selloff in late June, the major equity indices rebounded in July. Equity prices rose early in the month only to decline a bit beginning on July 21st. July was full of market moving news including the beginning of Q2 earnings season, a meeting of the FOMC (July 26-27), the Advance Estimate of Q2 GDP on July 29th and the Republican and Democratic national conventions. For the month, we saw gains across all major indices, including US Large Caps (DJIA rising +2.80% and S&P 500 rising +3.56%), US Small Caps (Russell 2000 rising +5.90%) and International (ACWX rising +4.07%). Volatility (as measured by VIX) was subdued with a month end reading of 12.23, well below the long run average of 20.0. The Barclays US Aggregate Bond Index rose +0.36% as the yield on the benchmark 10-year US Treasury bond fell from 1.49% to 1.46% during the month. In 2016, we see the following year-to-date benchmark performance data: DJIA (+5.78%), S&P 500 (+6.34%), Russell 2000 (+7.39%), International (+2.44%) and US Aggregate Bond (+4.63%).
GDP – The Advance Estimate of Q2 GDP growth released by the Bureau of Economic Analysis (www.bea.gov) showed that the US economy grew at an annual rate of +1.2%, a level much weaker than the +2.6% expected by many economists. Q1 GDP was also revised lower to a rate of +0.8%. Consumer spending, which accounts for almost 70% of US economic activity, was strong rising +4.2% and accounted for almost all Q2 GDP growth. During the quarter decreases were seen in private inventory investment, nonresidential investment, residential investment and state and local government spending. Weak business spending during the quarter was a significant drag on the economy. Inventory accumulation fell over $8.0 billion during the quarter, the first drop since Q3 of 2011. This decline in inventories subtracted 1.2% from Q2 GDP growth. The silver lining here could be that declining inventory balances may be a good signal for growth and provide a boost to output in the second half of 2016. The generally cautious outlook of US businesses is reflected in the reported decline of 3.2% for nonresidential investment (factories and machinery), the steepest drop since the recent recession.
Earnings – The Q2 earnings season is well underway with over 63% of the companies in the S&P 500 having reported their quarterly earnings. Thus far, the results are better than estimates (which were exceptionally low) made at the beginning of the reporting period as 71% have reported EPS above estimates and 57% have reported sales above estimates. Blended earnings growth for Q2 is coming in at -3.8%, better than the estimated earnings growth rate of -5.5% at the start of earnings season. An earnings decline in Q2 (should it hold as expected) would mark the first time the S&P 500 has seen five consecutive quarters of year-over-year earnings declines since Q3 2008 through Q3 2009. The percentage of companies reporting EPS above estimates (71%), is above the 5-year running average of 67%. The 12-month forward P/E ratio is 17.0, which is above the 5-year and 10-year averages. At the sector level, Consumer Discretionary is reporting the highest earnings growth rate of +9.4%. Technology, which had several notable upside surprises last week (Facebook and Alphabet) is still projecting an earnings decline of -2.0%. The Energy sector continues to struggle reporting the largest decline in earnings at -85.6%. The earnings picture should improve later this year with current quarterly estimates of Q3 (-0.6%) and Q4 (+6.3%).
