Onward and Upward
As the sun sets on another round of quarterly earnings that again proved the ability of companies to stay ahead of expectations, investors are left to observe that the “mini-correction” stocks experienced a month ago proved to be a fleeting buying opportunity. With just a small handful of retailers left to report, blue-chip stocks at record levels are in part a reflection of corporate America’s winning scorecard for the quarter, one in which S&P 500 companies produced sales growth of 4 percent that combined with better margins and share buybacks to generate high single-digit earnings gains. Not bad for a quarter where many feared that a suddenly stronger dollar would wreak havoc with so many blue-chip companies doing business overseas.
Puts and Takes
Topping the list of key themes we've observed over the past month’s reporting season is a stronger U.S. economy that companies are seeing juxtaposed against incrementally weaker economic conditions in Europe and slower growth from China. The stronger dollar is a by-product of a globally decoupled economy. But while it creates challenges for multinationals translating earnings from countries using the weaker euro and yen, it has had a silver lining for the American consumer. The comparative strength of the U.S. dollar has coincided with lower commodity prices in general and oil prices in particular. Each one-cent-decline in fuel prices at the pump boosts consumers’ disposable income by $1 billion, providing a major boost to household budgets ahead of the holiday selling season.
Investors got their first glimpse into how this dynamic might play out with Macy’s kicking off the third quarter reporting season for retailers with mixed results. The company delivered earnings above expectations, but on disappointing same-store sales that fell in the period. Despite management lowering earnings expectations, investors bid the stock higher, perhaps acknowledging Macy’s solid track record of expense controls, capital returns and the stock’s undemanding valuation. Whether the twin tailwinds of lower energy prices and a strengthening job market will fuel better holiday sales of the apparel, accessories and footwear that Macy’s sells is open to debate, but our bet is that Americans will spend their newfound income; it might just be that what they’re after turns out to be new gaming consoles, smartphones and SUVs!
Finally, we would be remiss to deny recognition of Europe’s impressive accomplishment of a space mission this week that, for the first time ever, landed a space probe on a comet. If only a continent with the bright minds required to pull off such a feat could realize and act upon the knowledge that its stagnant economy and accompanying 12 percent unemployment rate aren’t fixable by monetary policy alone. ECB leader Mario Draghi knows that newly enacted European style QE by itself won’t pull Europe out of its funk—only labor market reforms, a more competitive tax system, and lower power prices can pull off that deft landing.
Our Takeaways from the Week
- With all but the last few retailers yet to report, corporate America has delivered another solid quarter of earnings that have helped push stocks to record highs
- Tailwinds for the American consumer should result in healthy levels of holiday spending