Market Strategy 10/28/2019
Don’t Keep Me Wondering
Key Takeaways
- A plethora of economic data, earnings results, and October’s nonfarm payroll report are on tap in the week ahead.
- This week is the busiest of Q3 earnings season with 165 companies in the S&P 500 scheduled to report.
- Thus far through last Friday with 40% of S&P 500 companies having reported, sales and earnings results have beaten consensus expectations.
- News of progress in trade talks has boosted stock performance on expectations that both the US and China are ready to make a “Phase One” deal.
Investors will be kept busy this week with a brace of economic data that will provide opportunity to reflect on manufacturing, job growth, wages, unemployment, construction spending, housing, mortgage issuance and vehicle sales. On Wednesday the Federal Reserve’s benchmark interest rate decision is scheduled with market participants looking for a third cut of 25 basis points since the Fed embarked on its “mid-cycle adjustment.”
On the earnings front 165 companies in the S&P 500 are scheduled to report Q3 results this week making this the busiest of the earnings season. A majority of companies in the communications, energy, and real estate sectors will be reporting along with other S&P 500 sector companies. Among the bellwether names reporting this week are Apple (AAPL), Google (GOOG) and Facebook (FB).
With some 40% of the S&P 500’s companies having reported through last Friday, sales and earnings growth (respectively 3.66% and -0.51%) have thus far beaten consensus expectations. Before the start of the earnings season consensus analysts had sharply cut expectations for the season and were looking for earnings growth to fall 4.6%.
By the end of this week nearly 80% of the index market cap will have reported, which should provide a clearer view as to how the earnings season might conclude. We continue to expect that this earnings season will deliver enough positive surprises to beat earlier consensus expectations for a 4.6% decline in earnings growth for the quarter. That said, we’ll keep our fingers crossed and avoid counting our chickens before they hatch.
With monetary policy stateside and abroad thus far this year accommodative (in consideration of factors that include economic slowing, trade war tensions, and weakening economic data abroad) major equity benchmarks around the world have performed remarkably well with a significant number showing gains on a year-to-date basis through last Friday in excess of 15% and 20% priced in their respective local currencies.
You Say You Want a Resolution, Well You Know
Low interest rates (driven by monetary policy makers and fund flows in thirst for yield) throughout most of the world as well as the thought that the trade war between the US and China is growing “long in the tooth” and could see a “phase one” resolution before year-end have been central to the moves higher in equity prices this year. The risk to global stocks moving higher from here would appear to us most likely to come from a repeat of what occurred between the US and China last May when negotiators walked away from the table.
In our view it is fortunate that likely “enough water” has flowed under the proverbial “bridge” (in terms of economic data that points to global slowing) to warrant market participants’ expectations that an increase in willingness on both sides to make genuine progress toward a settlement is real.
Our expectations are for continued progress in the trade talks notwithstanding some room for episodes of “two steps forward, one step back” in the process. The complexities embedded in the global trade process along with the ideological differences between the US and China dictate that even if Phase One “gets some ink on the page” from the respective signatories a broad and complete resolution is likely not yet on the horizon.
Don’t You Know It’s Gonna Be All Right, All right…
We remain overweight US equities while maintaining meaningful exposure to foreign equities in developed and emerging markets. We continue to favor (as we have for some time) cyclical sectors over defensive sectors. Among the 11 sectors of the S&P 500 our favorites remain Consumer Discretionary, Information Technology, Industrials and Financials.
While we view progress toward a resolution of the trade/tariff war as key to market performance in the months ahead the underlying secular trends of globalization and technology have been and remain key in providing substantial positive offset to interim negatives that are driven by political, geopolitical and cyclical factors.
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