Market Update: Friday, October 19, 2018

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Daily Insights

  • New LPL Market Signals Podcast. On the latest episode of the LPL Market Signals Podcast, listen to LPL Financial Chief Investment Strategist John Lynch and Senior Market Strategist Ryan Detrick discuss signs for strong third-quarter earnings and a potential year-end rally following the stock drop.

  • Finding a bottom. U.S. stocks are still struggling to bottom, just two days after their strongest rebound since March. The S&P 500 Index fell 1.4% yesterday after Federal Reserve (Fed) minutes indicated policymakers discussed rates eventually rising above the neutral rate (and into restrictive policy territory). The S&P 500 is flirting with its fourth straight weekly loss, a streak not seen since October 2014. Nevertheless, we still remain optimistic on domestic equities here, especially given the bright outlook for corporate profits.

  • So far so good. Earnings season is off to a good start with results from 70 S&P 500 companies in the books. A solid 78% of firms have beaten earnings estimates, while 62% have exceeded revenue forecasts (source: Thomson Reuters). S&P 500 earnings growth is tracking to a 22% year-over-year increase, slightly above the 21.6% estimate at quarter end and supported by strong U.S. economic growth, robust U.S. manufacturing activity, tax cuts, and big increases in energy and financials sector profits. Despite tariffs and trade tensions, slower growth in China, and pressure on profit margins, estimates for the fourth quarter (+20%) and 2019 (+10%) have barely budged in October, an encouraging sign amid several company anecdotes during the quarter about a softening economic environment overseas. In Monday’s Weekly Market Commentary, we will provide an earnings season update, expanding on our earnings blog from October 15.

  • Italy budget spurs EU ire, China rebounds on government “encouragement.” Italian government bond yields are at four-year highs, while the FTSE MIB Italy Index is tracking its fourth straight weekly decline as traders prepare for a potential tussle between government officials and the European Union (EU) over the country’s budget plan for next year. The proposal shows the budget deficit expanding to 2.4% of gross domestic product (GDP), but EU officials fear the real deficit could be much higher and are expected to send what analysts anticipate will be a strongly worded letter requesting clarifications on the spending plan. The full draft budget will be submitted to the Italian parliament by tomorrow and lawmakers will need to approve it by the end of the year.

  • China Stocks rebound. Elsewhere, stocks in China rebounded overnight after investors shrugged off weaker-than-expected third-quarter GDP data, instead focusing on comments from securities regulators encouraging institutional investors to help resolve liquidity issues at listed companies caused by stock pledging, and speed up approval for mergers and acquisitions as part of efforts to boost market confidence. The Shanghai Composite’s 2.6% gain in the session, however, failed to lift the index into the green on the week (-1.3%).

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Friday

  • Existing Home Sales (Sept)
  • Baker Hughes U.S. Rig Count (Oct)


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Index data obtained via FactSet

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