Market Update: Monday, October 22, 2018

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Daily Insights

  • 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.

  • Earnings season off to a good start. Third quarter earnings season is rolling and so far results have been quite good overall, supported by strong U.S. economic growth, robust U.S. manufacturing activity, tax cuts, and big increases in energy and financials sector profits. In today’s Weekly Market Commentary, we recap the results of earnings season thus far, discuss why we expect strong results to continue, and highlight several keys we are watching. This week is the busiest of the season, with 160 S&P 500 companies reporting results.

  • Earnings season dashboard returns. With 84 S&P 500 companies having reported, year-over-year earnings growth for the index is tracking to 22%, slightly above the 21.6% figure at quarter end and 3 percentage points slower than the second quarter, according to FactSet. Revenue growth is tracking to a solid 7.3% increase, though below last quarter’s 9.5% increase. An excellent and above-average 79% of companies have beaten earnings estimates, while the percent of companies that have exceeded revenue targets, 62%, is above the long term average of 60%, but below the 73% average over the past four quarters. The modest upside to estimates thus far, and the drop in the revenue beat rate, point to a modest upside surprise to current estimates, though a 23-24% potential earnings growth rate for the quarter is hardly something to sneeze at.

Earnings Dashboard 10.22.18

  • China stocks rally most since 2016 as government support continues. The Shanghai Composite added another 4.1% overnight to Friday’s 2.6% advance after a series of announcements promised ongoing stimulus for China’s economy and financial markets. President Xi promised “unwavering” support for non-state firms, while the country’s stock exchanges promised to help manage risks linked to the heightened levels of shares posted by investors’ as collateral. Also, government officials announced a cut to personal income taxes, a move that analysts expect could boost retail sales by as much as 1% and help make the government 6% target for economic growth in 2019 more attainable. The moves indicate that the government is indeed willing to take the necessary steps to support the Chinese economy and may be the catalyst that emerging markets stocks need to keep the asset class from losing more ground to the U.S. before a potential catalyst arrives in the form of a trade agreement with the U.S.

  • Italian stocks, broader Europe resilient after Italy’s credit rating downgraded. Pressure on Italy’s sovereign debt eased somewhat in Monday trading, which also supported equities, despite a rating downgrade to the lowest notch of investment-grade quality over the weekend. Sentiment was boosted after the European Commission softened its tone on the country’s 2019 budget proposal, though expectations remain for the European Union to take the unprecedented move of rejecting it. And while Italy’s 2.4% projected spending deficit falls within the EU’s 3% guideline, the country’s debt-to-GDP ratio of ~132%, well above the maximum 60% and second only to Greece, means it will expand that gap rather than shrink it. The rebound in Italy’s financial markets is helping to lift sentiment more broadly with investors growing increasingly concerned, as measured by the yield spreads between Italian and German 10-year bond yields, that the country’s woes could impact other countries in the Eurozone. While European officials have tools necessary to address the situation if necessary, this is another example of why we remain cautious on foreign developed markets.

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Click Here for our detailed Weekly Economic Calendar

Tuesday

Wednesday

  • Markit PMI — Manufacturing (Preliminary, Oct)
  • Markit PMI — Services (Preliminary, Oct)
  • New Home Sales (MoM, Sep)
  • Federal Reserve’s Beige Book (N/A)
  • Japan Leading Index (Aug)
  • Japan PPI Report (Sep)

Thursday

Friday

  • GDP Report (QoQ, 3Q)
  • Core PCE (QoQ, 3Q)


IMPORTANT DISCLOSURES

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. The economic forecasts set forth in this material may not develop as predicted.

All indexes are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment.

Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.

All company names noted herein are for educational purposes only and not an indication of trading intent or a solitication of their products or services. LPL Financial doesn’t provide research on individual equities.

All performance referenced is historical and is no guarantee of future results.

This research material has been prepared by LPL Financial LLC.

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Index data obtained via FactSet

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