Markets, GDP and Corporate Earnings on February 1, 2018
Written by Rick Welch
This report is written as an executive summary of how we have interpreted recent market, GDP and corporate earnings data. If you have any questions, please do not hesitate to contact Rick Welch at (215) 603 2976 or email@example.com.
Markets – With the holiday season over and a few weeks to study and consider the impact of the Tax Cuts and Jobs Act of 2017, investors began 2018 with a renewed, more bullish view of both US and international equities. Rebounding corporate profits (both here and abroad), together with synchronized global economic growth not seen since 2007, low market volatility and accommodative monetary policy were the story as equity markets opened strongly in 2018 and moved nicely higher until a short, but broad sell off at month end. In January, domestic and international equities all moved higher as we saw gains in US Large Caps (S&P 500 was +5.78% and DJIA was +5.78%), US Small Caps (Russell 2000 was +2.54%), and International (ACWX was +5.46%). Volatility (as measured by VIX) finished January slightly elevated at 13.77, but still below the long run average of 20. The Barclays US Aggregate Bond Index fell -1.12% as the yield on the benchmark 10-year US Treasury bond jumped from 2.40% to 2.72% (the highest level since March of 2014) during the month. The January meeting of the FOMC resulted in no change in monetary policy as the benchmark interest rate remained in a range of 1.25% to 1.50%.
GDP - The Advance Estimate of Q4 GDP growth released by the Bureau of Economic Analysis (www.bea.gov) showed that the US economy grew at an annual rate of 2.6% in the final quarter of 2017, below consensus forecasts of 3.0%. This result followed two consecutive quarters above 3.0% (3.1% in Q2 and 3.2% in Q3). During the quarter, increases were seen in personal consumption expenditures (PCE), nonresidential fixed investment, exports, residential fixed investment, state and local government spending and federal government spending, all of which were partly offset by negative contributions from private inventory investment and net exports, the latter which subtracted 1.13% from GDP growth, the most in over a year. Strong consumer spending and business investment suggest that economic growth will continue as we move into 2018. Consumer spending, which accounts for almost 70% of US economic activity, rose 3.8% during the quarter. Business equipment investment increased 11.4% (fastest pace in 3 years) and added 0.62% to GDP. Nonresidential fixed investment, which includes office buildings and factories, increased 6.8% and added 0.84% to growth. The personal saving rate, which is personal saving as a percentage of disposable income, was 2.6% in Q4 compared to 3.4% in Q3.
Earnings - The Q4 earnings season is well underway with over 40% of the companies in the S&P 500 having reported their quarterly earnings. Thus far, the results are better than expected with 76% reporting (EPS) above estimates and 81% reporting sales above estimates. EPS and sales growth are both above their 5-year running averages. Blended earnings growth for Q4 is coming in at 12.0% (with all sectors reporting growth for the quarter), higher than the estimated Q4 earnings growth rate of 11.0% at the start of earnings season. On a sector basis, thus far, we see strong earnings growth in Energy (+139.1%), Materials (+29.9%), Technology (+16.5%), Financials (+14.6%) and Utilities (+12.4%). The Telecommunications sector is reporting the lowest year-over-year earnings growth rate of +2.2%. From a valuation perspective, the forward 12-month P/E ratio has now risen to 18.4, above both the 5-year and 10-year averages. Forecasts for earnings growth in 2018 look promising with consensus estimates coming in at +16.3%.