Weekly Market Watch – Strong U.S. Earnings – Friday July 28, 2017

July 28, 2017

Strong U.S. Earnings

It was an event-filled week with U.S. corporate earnings set to test the equity bull market which has propelled stocks higher for the past eight years. After a record Q1 in which earnings per share growth hit a multi-year high, market watchers should expect a slowdown but they should also expect a healthy rate of expansion. With nearly 50% of S&P 500 companies reporting thus far the index is on pace to report a yoy expansion of 9.0% according to FactSet. That’s below the 13.8% rate in Q1 but more than sufficient to maintain the positive earnings surprise trend. Turning to economic news, U.S. consumer conference bounced back after slipping the previous three months. The conference board on Tuesday said its index rose to 121.1 in July from a revised 117.3. In March, the index hit 124.9, the highest level since December 2000. In central bank news, the U.S. Federal Reserve made no policy changes Wednesday but did say it would start unwinding its balance sheet “relatively soon”. In commodities news, Saudi Arabia, the world’s top oil exporter, said Monday it would further cut production and threatened to take action on others that aren’t keeping their promise to cut output. In political news, there was concern about policy direction from the White House following the failure to dismantle the Affordable Care Act and investigations into contacts with Russians before the November election. Turning to Europe, a Purchasing Managers Composite Index came in at 55.8 for July, lower than anticipated suggesting the economy grew slightly more slowly than analysts had expected. Also in Europe, U.K. GDP for Q2 came in at a lacklustre rate of 0.3%, a modest improvement from Q1 which posted a 0.2% growth rate. Looking ahead, we’ll see Q2 GDP figures today for both Canada and the U.S.

Tech Stocks Slip

Most major North American stock benchmarks ended in positive territory to close out the last week of July. For the four days covered in this report, the Dow rose 216 pts. to close at 21,796, the S&P 500 added 3 pts. to finish at 2,475 and the Nasdaq gave back 5 pts. to settle at 6,382. The TSX was up 8 pts. through Thursday to end the session at 15,191.

Maintaining Overweight Equities

Equities: Strong U.S. Q2 results (73.6% beat their respective earnings estimates with an average 6.4% surprise) and a rise in global bond yields (U.S. 10 year Treasury now at 2.3% and pointing higher) creates an ideal backdrop for a continued rise in the global equity bull market. We continue to hold our overweight view (from Q1’16) and believe a rotation into cyclically-oriented sectors offers the best opportunities at the expense of defensives. Sector-wise, we retain a preference for banks, insurance, brokers, energy, chemicals, metals, paper, communications equipment, select retail, autos, industrials, and health care. Geographically, we went overweight Europe in Q1 and believe the time has come to include Canada within that overweight discussion in view of improving commodity pricing.