Financial Market Update

—July 31, 2017

The summary below is provided for educational purposes only. If you have any thoughts or would like to discuss any other matters, please feel free to contact me.

New Highs and Favorable Fundamentals

 On July 11, 2016, the S&P 500 Index posted its first all-time closing high in almost 14 months (St. Louis Federal Reserve). Since then, the broad-based index of 500 large U.S. companies has recorded 48 new highs, including two last week (LPL, St. Louis Federal Reserve).

The most reasonable explanation for the latest run is primarily found in the fundamentals – earnings driven by economic growth, both at home and overseas.

Q2 profit season is off to a very good start. With 58% of S&P 500 firms having reported, earnings are forecast to rise 10.8% versus a year ago (Thomson Reuters), up from an estimate of 8.0% made on July 1.

The chart below illustrates the sharp improvement in earnings, with profits expected to rise at a double-digit rate for two consecutive quarters. Notably, it also highlights the impact from the collapse in energy earnings, and the subsequent but modest recovery in energy earnings (all tied to oil prices).

Currently, 73% of S&P 500 firms have posted profits ahead of Wall Street forecasts. That’s above the historical average of 64% (Thomson Reuters).

But it’s not just firms keeping a close eye on expenses. Modest growth at home is being amplified by an acceleration in economic growth around the globe.

You see, S&P Dow Jones Indices recently reported that sales overseas account for 43% of total sales of S&P 500 firms. It is just an estimate, as not all firms breakout sales by geography. Still, it highlights that the global economy does have an impact on corporate profits.

That said, revenue growth is beginning to accelerate and top expectations, which is adding to the upbeat mood. Currently 71% of firms are beating sales estimates, which is well above the long-term average of 59%.

We see it anecdotally in remarks made in various press releases.

“While the activity outlook in North America for the second half of the year remains robust, we are now also seeing more positive signs in the international markets…”

—Large oil service provider

“Mining and oil-related activities have come off recent lows, and we are seeing improving demand for construction in most regions….…we are confident in raising our full-year 2017 outlook.”

—Large construction equipment maker

Results “were powered by economic tailwinds in the U.S. and globally.”

—Major transaction provider

Sources: Investor Relations, respective firms

Add still-low interest rates and a slow-to-tighten Fed to the mix, and investors have driven stocks to new highs this year.

Kyle Hurt CFP

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 1 The Dow Jones Industrials Average is an unmanaged index of 30 major companies which cannot be invested into directly.  Past performance does not guarantee future results.

2 The NASDAQ Composite is an unmanaged index of companies which cannot be invested into directly.  Past performance does not guarantee future results.

The S&P 500 Index is an unmanaged index of 500 larger companies which cannot be invested into directly.  Past performance does not guarantee future results.

The FTSE Developed ex North America Index is an unmanaged index of large and mid-cap stocks providing coverage of developed markets, excluding the US and Canada. It cannot be invested into directly. Past performance does not guarantee future results.

5 New York Mercantile Exchange front-month contract; Prices can and do vary; past performance does not guarantee future results.

6 London Bullion Market Association; gold fixing pricing at 3 p.m. London time; Prices can and do vary; past performance does not guarantee future results.


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