The S&P 500 closed at a new record high on Friday as stocks rallied for a fourth week. The S&P 500 is still up over 7% year to date and medium sized companies as measured by the S&P Midcap 400 index are now up over 11% year to date. The tech heavy NASDAQ is currently trailing other major indices and is up a little over 1% year to date.
I’ve mentioned a number of times that stocks typically follow earnings. Earning season for the second quarter is in full swing and has a heavy impact on the short term direction of markets. With 25% of companies in the S&P 500 reporting earnings so far for Q2, 68% have reported earnings above the mean estimate and 57% have reported revenues above the mean estimate. We are now expecting a blended earnings decline of -3.7% for Q2 (this is down from -5.5% as of June 30th) and if this comes to pass, will mark the 5th consecutive quarter of earnings decline. This has contributed to the choppy sideways pattern of stocks since late 2014. The good news as you can see from the chart below, is that both stock prices and the 12 month expected earnings growth have recently seen slight gains for the first time in over a year. (source: FactSet)
Bonds fell a fraction this week as the prospects for inflation and appetite for risk seem to have increased.
The market is still not expecting an increase in interest rates at the Fed’s July 27th meeting. The CME Fed Watch tool shows a 97.6% chance that interest rates will remain in the 25-50 basis point range as they are today.
Finally, two of the headwinds to earnings growth have been drag from energy companies and the strong US dollar.
Here is a chart of oil which has started to trend down which could hurt the earnings of energy companies.
Here is a chart of the US dollar which has been in an uptrend since Brexit. This could spell trouble for future earnings of US exporters.
Have a wonderful weekend!
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