Friday revealed strong earnings in large cap tech-fueled stocks, resulting in a slightly positive week for the market. This leaves the S&P 500 at another all-time high. Interest rates ticked up as well, as economic data continued to show improvements. The 10-year U.S. Treasury ended the week with a yield of 2.43 percent, up from 2.35 percent.
Where Do We Go from Here?
A question that we have frequently been receiving of late has been, “Why is the market at all-time highs with all the dysfunction in Washington?” The answer is that investors are not focusing on the Washington headlines; rather, investors are focused on the economic headlines. For instance, this morning, U.S. GDP growth for the third quarter came in at 3 percent. This was 0.5 percent higher than estimates, and in the face of two major hurricanes. This was followed up by consumer confidence data from the University of Michigan at 100.7, which is the highest level since 2004. This data point is supportive of continued economic growth.
This global growth has found its way into company earnings. Estimates for third quarter earnings growth of the S&P 500 was for 3 percent, primarily due to declines in the insurance space caused by hurricane damage. However, with over half of S&P 500 companies reporting, earnings have come in growing over 8 percent, driven by 22 percent growth in the technology sector. This was highlighted this morning with three big cap names: Microsoft beat earnings estimates by 17 percent (stock up 7 percent), Alphabet/Google beat estimates by 14 percent (stock up 5 percent) and Intel beat estimates by 22 percent (stock up 8 percent).
Last week marked the thirtieth anniversary of the infamous Black Monday stock market crash. At today’s level of the Dow, a selloff of 508 points on the Dow Industrial Average would be slightly over 2 percent, a regular occurrence during any given year. However, back in 1987 it was a 23 percent decline. This fall was the single worst day percentage selloff in stock market history. The irony of that selloff is that the market still finished the year positive. We bring this up for perspective in response to client concern about the strength of the U.S. equity markets. Most major U.S. stock indices are at or near all-time highs, and the journey over the last 15 months since a major correction has been fairly smooth. What will happen in the final two months of the year? It’s hard to say, but with earnings and economic support, coupled with favorable seasonality trends (see chart below), we would remain positive on equities.
Takeaways for the Week:
- Earnings growth is fueling stocks higher
- Historically, the fourth quarter is very favorable for U.S. equities