The highly anticipated quarterly earnings season has kicked off as key names within the banking sector reported results. The initial data appears positive as it relates to sales growth, yet the consensus remains one of broad neutrality in bottom line revenue growth for the Standard & Poor’s (S&P) 500. While only 33 companies have reported earnings, the relationship between strong sales growth, and neutral earnings growth, has held true. As we look ahead to the next couple of weeks, it’s important that we carefully analyze the earnings data on a longer spectrum rather than just the latest quarterly data. This is crucial for two reasons. Firstly, the notion of establishing a pattern from one data set (i.e. one quarterly earnings season) is not something that provides long-term benefits for those investors willing to participate in the bounty of global equity markets. Secondly, and most importantly in our view, is the fact that 2018 posted an impressive 20% increase in profits, which was a bonus to the impressive 2017 upside. To suggest the possibility that earnings growth may post neutral figures for a quarter, or two, in 2019 should not be a shock factor to market participants. In fact, it should be a welcomed occurrence. As the current business cycle ends, which is inevitable, the catalysts needed to start a new cycle revolve around macroeconomic factors and other critical catalysts, such as earnings neutrality. When aggregating such data in the absence of a true bubble-like risk scenario within equity markets, which is currently the case, the backdrop remains supportive of long-term equity market participation within a platform that attempts to take advantage of short-term opportunities.
Shifting to economic data releases, small business optimism figures were reported near economists’ expectations during the week, yet the overall level remains well below the August 2018 record highs. Despite that, however, small business sentiment does appear to have trailed the activity of the equity market from latter part of the previous year (referring to the equity market volatility in the fourth quarter of 2018). This indicates that sentiment within America’s heartbeat (i.e. small business) was negatively impacted by factors that remained out of their control. This has certainly occurred numerous times in the past, but it tends to be short lived when realizing the lack of a true systemic risk to small businesses. When considering the strong upside across global equity markets in the early part of 2019, it remains plausible to assume that sentiment will rise in future small business sentiment readings. To further support that notion, especially as it relates to the potential for more robust consumer consumption, the labor market remains in an astonishingly strong stance, which may have the ability to further boost wage growth figures. We learned during the week that job openings in the U.S. declined at the fastest monthly pace since mid-2015. The importance of that cannot be overlooked when considering the tight nature of the labor market and what this may mean for net private job creation in the months to follow. We believe this to mean that the robust nature of job creation may have room to run, albeit the runway is getting much shorter. We have discussed this extensively in previous commentaries and it’s something we’re closely paying attention to.
On the global equity market front, the FTSE All World Equity Index closed the week higher by 0.48% and was led higher by U.S. based indices, which was a change from the previous week when European equities posted the best upside. Looking ahead to next week, the release of industrial production data and overall jobless claims may help shape near-term risk momentum.
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Investment advice offered through CX Institutional, a registered investment advisor.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly. The economic forecasts set forth in the presentation may not develop as predicted.