6 Reasons to Expect a Good Earnings Season

As fourth quarter earnings season kicks into high gear, we’ve put together a list of six reasons why we expect it to be a good one:

  1. Economic surprises: The U.S. Citi Economic Surprise Index, a measure of economic data relative to expectations, is near record highs, and economic momentum points to good upcoming results.
  2. Strong manufacturing activity: Manufacturing surveys (ISM and PMI indexes) have been among the strongest in a dozen years and are historically well correlated with earnings growth.
  3. Weak U.S. dollar: Dollar weakness (-6.0% in the fourth quarter) props up overseas earnings for U.S.-based multinationals and may present a tailwind for fourth quarter earnings.
  4. Pre-announcements: The trend for fewer negative profit warnings tend to lead to better-than-expected earnings results.
  5. Stable estimate revisions: Analysts’ estimates for the fourth quarter have remained largely unchanged—resilient estimates are typically a positive sign for final results.
  6. Higher energy prices: Higher oil prices mean more profits for energy companies (6% of the S&P 500 Index weighting) and also more investment in energy infrastructure via the industrial sector.

Considering these trends, John Lynch, Chief Investment Strategist, notes that the combination of solid global demand, tighter corporate income statements, and the recent tax law indicate that profitability remains a strong tailwind entering 2018.

We will provide a more detailed earnings season update in our next Weekly Market Commentary.

*E=Estimate

IMPORTANT DISCLOSURES

Past performance is no guarantee of future results. All indexes are unmanaged and cannot be invested into directly.

The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security.

The economic forecasts set forth in the presentation may not develop as predicted.
Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal and potential illiquidity of the investment in a falling market.

The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

Because of their narrow focus, specialty sector investing, such as healthcare, financials, or energy, will be subject to greater volatility than investing more broadly across many sectors and companies.

This research material has been prepared by LPL Financial LLC.

To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial LLC is not an affiliate of and makes no representation with respect to such entity.

Not FDIC/NCUA Insured | Not Bank/Credit Union Guaranteed | May Lose Value | Not Guaranteed by any Government Agency | Not a Bank/Credit Union Deposit

Securities and Advisory services offered through LPL Financial LLC, a Registered Investment Advisor Member FINRA/SIPC

For Client Use – Tracking # 1-689317 (Exp. 01/19)

Market Update: Thursday, January 18, 2018

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Market Recap

  • Major indexes finished broadly higher. Focus returned to positive fundamental backdrop; Dow +1.3%, S&P 500 Index +1.0%, Nasdaq +1.0%.
  • All sectors gained; technology, consumer staples led advance. Telecommunications, consumer discretionary lagged.
  • Positive market breadth (NYSE 1.8:1, Nasdaq 1.9:1), volume remained elevated (~117% of 30-day avg.).
  • Treasury yields rose amid risk-on trading; 10-yr. yield +4 basis points (+0.04%) to 2.57%.
  • Commodities: WTI crude oil held near flat (+0.3% to $63.91/bbl.), COMEX gold softened -0.6% to $1329/oz., industrial metals mostly higher.
  • Economic data: Bank of Canada increased its target for the overnight rate to 1.25 percent, as expected. Continue reading

Is the Yield Curve Suggesting a Recession Is Looming?

The U.S. Treasury yield curve has received a lot of attention in recent months as the difference between short- and long-term yields has fallen. But why is this important?

The yield curve is a graphical representation of bond yields of similar credit quality across a range of maturities. A flattening curve, when shorter-term rates rise more quickly than longer-term rates (or fall more slowly), is often perceived as an indication that slower growth lies ahead. An inverted yield curve, where short-term rates are higher than long-term rates, has historically been an indicator that a recession is on the horizon. Continue reading

Market Update: Wednesday, January 17, 2018

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Market Recap

  • Major indexes shed early gains to finish lower. No clear catalysts for sell-off; Dow (-0.04%) lost footing after breaking through 26,000. S&P 500 Index -0.4%, Nasdaq -0.5%, Russell 2000 -1.2%.
  • Most sectors lower. REITs (+0.5%), healthcare (+0.5%), consumer staples (+0.4%) the only advancers; energy (-1.2%) the biggest decliner with oil’s pause amid multi-week rally.
  • Negative market breadth (NYSE 2:1, Nasdaq 2:1) amid elevated volume (~130% of 30-day avg.).
  • Treasuries flat-to-stronger; 10-year yield -1 basis point (-0.01%) to 2.54%.
  • Commodities: WTI crude oil -0.8% to $63.79/bbl., COMEX gold +0.3% to $1339/oz., industrial metals mixed to lower.
  • Economic data: Empire State Manufacturing data for December came up short (17.7 vs. 19.0) and fell vs. prior month’s upwardly revised reading (19.6), but remains at expansionary levels. Continue reading

2-Year Treasury Reaches Milestone

The 2-year Treasury yield has had a strong move higher over the past few months. After surpassing the dividend yield of the S&P 500 Index in October, it hit another threshold on Thursday as it closed above the 2.0% level for the first time since September 2008, as shown in the chart below. What caused this recent run up?

There are a number of reasons for the move higher in short-term yields, but three of the biggest drivers are likely:

  • Federal Reserve (Fed) rate hike expectations
  • Anticipation of increased Treasury issuance
  • Potential for higher inflation

We believe that inflation is a critical piece of the puzzle, as the core reading in last week’s Consumer Price Index (CPI) report came in above expectations, at 1.8% year over year. This is still below the Fed’s 2.0% target, but market expectations of future inflation, as measured by 10-year breakeven inflation (the difference between the yield on 10-year Treasuries and 10-year Treasury Inflation-Protected Securities), as well as the Fed’s 5-year, 5-year forward inflation forecast (a forecast of 5-year inflation, 5 years from now) are both just above 2.0% currently.

We think the Fed will remain gradual with rate hikes despite the inflationary pressures that are likely to emerge this year. Wage inflation has to rise to a greater degree than what current trends are indicating before levels threaten to force the Fed’s hand. Per John Lynch, Chief Investment Strategist: “Regarding inflation, we remain focused on wages, which on average represent more than two-thirds of business’ costs. If they’re not rising at a threatening pace, it’s hard to have a sustainable inflationary threat. Currently, wage growth is tracking to 2.5% year over year, but historically levels above 4.0% have been indicative of more persistent inflation and an aggressive Fed.”

 

IMPORTANT DISCLOSURES

The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security.

Past performance is no guarantee of future results.

The economic forecasts set forth in the presentation may not develop as predicted.

Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal and potential illiquidity of the investment in a falling market.

The S&P 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

The Federal Reserve (Fed) is the central bank of the United States. Its unique structure includes a federal government agency–the Board of Governors–in Washington, D.C., and 12 regional reserve nanks (Atlanta, Boston, Chicago, Cleveland, Dallas, Kansas City, Minneapolis, New York, Philadelphia, Richmond, San Francisco, and St. Louis).

The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.

Government bonds and Treasury bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. However, the value of fund shares is not guaranteed and will fluctuate.

This research material has been prepared by LPL Financial LLC.

To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial LLC is not an affiliate of and makes no representation with respect to such entity.

Not FDIC/NCUA Insured | Not Bank/Credit Union Guaranteed | May Lose Value | Not Guaranteed by any Government Agency | Not a Bank/Credit Union Deposit

Securities and Advisory services offered through LPL Financial LLC, a Registered Investment Advisor

Member FINRA/SIPC

For Client Use – Tracking #1-688070

Market Update: Tuesday, January 16, 2018

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Market Recap

  • Another strong week as domestic markets kicked off Q4 earnings season. Friday ended with all major indexes higher; Dow +0.9%, S&P 500 Index +0.7%, Nasdaq +0.7%, Russell 2000 +0.3%.
  • Consumer discretionary, energy, financials led markets; rate-sensitive utilities, REITs underperformance continued.
  • Treasury yields slightly higher; 10-yr. yield +1 basis point to 2.55%.
  • NYSE breadth positive (1.2:1), Nasdaq (1.5:1), volume picked up a bit ~104% of 30-day avg.
  • Commodities: WTI crude oil strength persisted (+0.9% to $64.34/bbl.), COMEX gold climbed +1.3% to $1339/oz., industrial metals mixed.
  • Economic news: U.S. Consumer Price Index, retail sales data came back in line with expectations (+0.1%, +0.4% month over month).

Continue reading

Your Weekly Update – China Spooks Markets; Stocks Keep Rising

Weekly Performance

US: S&P 500 Index +1.57%, Dow +2.01%, Nasdaq +1.74%
Europe: STOXX Europe 600 +0.29%, German DAX +0.32%, France CAC 40 +0.52%, U.K. FTSE 100 +0.19%
Asia: Japan Nikkei -.26%, China Shanghai Composite +1.10%, Korea KOSPI –0.04%
10-Year Treasury yield: +8 basis points to 2.55%, WTI crude oil +4.7%, COMEX gold +1.3%

It was another positive week for equities despite midweek jitters following reports that China’s central bank was mulling over the idea of reducing or even halting purchases of U.S. government debt. Continue reading

Is Foreign Demand for Treasuries Fading?

Speculation that China could be looking to reduce or even halt its U.S. Treasury purchases going forward has flooded media outlets recently and spooked investors. Following the news Treasury yields were sent to more than 10-month highs likely on concerns that significant changes to China’s Treasury holdings could trigger a sell-off in both bond and equity markets. Continue reading

Market Update: Friday, January 12, 2018

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Market Recap

  • Domestic markets resumed their climb. China’s pushback on claims of reducing U.S. Treasury purchases and strong oil provided tailwind. Dow +0.8%, S&P 500 Index +0.7%, Nasdaq +0.8%.
  • Energy and consumer discretionary up soundly; rate-sensitive utilities, REITs continue to underperform.
  • Treasury yields moved downwards; 10-yr. yield -2 basis points to 2.54%.
  • NYSE breadth widely positive (3.4:1), volume a little light ~98% of 30-day avg.
  • Commodities: WTI crude oil started very strong, but closed the day flat at $63.57/bbl., COMEX gold +0.2% to $1322/oz., industrial metals closed mostly higher.

Continue reading