Markets, GDP and Earnings on August 1, 2015
Written by Rick Welch on August 1, 2015
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 do not hesitate to contact Rick Welch at rickwelch@academywealthadvisers.com or (215) 603 2976.
Markets – The major equity indices ended July on a moderately upbeat note. Early in the month we saw markets climb as they welcomed the apparent resolution of the Greek debt crisis. By mid-month the focus was on tepid earnings and poor top line growth and the markets dove over 3% in just five trading days. By month end, the markets were calmed by the July Fed “No Action” findings and a rebound in Q2 GDP growth. For the month we saw gains only in US Large Caps (+1.97%), while International (-0.22%) and US Small Caps (-0.22%) both registered small losses. Volatility (as measured by VIX) decreased, entering July at 18.41 and ending at 12.12, both levels 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 2.33% to 2.21% during the month. For 2015, we see the following year-to-date benchmark performance data: DJIA (-0.74%), S&P 500 (+2.18%), Russell 2000 (+2.82%), International (+2.46%) and Aggregate Bond (-1.03%).
GDP - The Advance Estimate of Q2 GDP growth released by the Bureau of Economic Analysis (www.bea.gov) showed a quarter-over-quarter annualized rate of expansion of +2.3%, which growth rate was generally below most estimates in the range of +2.5% to +2.7%. Q1 GDP growth was revised upwards to show an expansion of +0.6%, which is a significant improvement over the previously reported Q1 contraction of -0.2%. Both Q1 and Q2 results are solid, yet unexciting and are in line with 10-year GDP growth patterns. The temporary factors (harsh winter weather and west coast port strike) which impacted growth in Q1 were not part of the story in Q2. An early read shows increases in personal consumption expenditures or PCE (+2.9%), durable goods (+7.3%), nondurable goods (+3.6%), services (+2.1%), state and local government spending (+2.0%) and exports (+5.3%). Decreases were seen in nonresidential investment (-0.6%), federal government spending (-1.1%) and investment in private inventories(-0.08%). As previously noted, during Q2 consumer spending grew more briskly at +2.9% (+1.9% in Q1) while the personal saving rate was 4.8% in Q2, compared to 5.2% in Q1.
Earnings - The Q2 earnings season is well underway with over 71% of the companies in the S&P 500 having reported their quarterly earnings. Thus far, the results are generally in line with diminished expectations as 73% have reported (EPS) above estimates and 52% have reported sales above estimates. Blended earnings growth for Q2 is coming in at -1.3%, better than the estimated Q2 earnings growth rate of -3.6% at the start of earnings season. The percentage of companies reporting EPS above estimates (73%) is in line with the 5-year running average of 73%. The forward 12-month P/E ratio is 16.6, which is above the 5-year average. At the sector level, Consumer Discretionary has the highest percentage of companies reporting earnings above estimates, while Health Care and Financials have the highest percentages of companies reporting revenue above estimates. Estimates of Q2 revenue growth across all sectors indicates a decline of -8.8%, the largest such decline since Q3 2009 (-11.5%). Thus far, Health Care (+14.7%) is reporting the highest earnings growth rate. As expected, the struggling Energy sector is reporting year-over-year declines in both earnings (-57.0%) and revenues (-32.7%).
