Green Shoots in February

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by Shawn Narancich, CFA
Executive Vice President of Research

High and Right

The offhand reference to stock charts in a rising trend accurately describes the good times stock investors have enjoyed so far this year. For those who hung tight amid the carnage of December, the S&P 500 has delivered returns just shy of 11 percent so far this year. Geopolitics and monetary policy are at play. Growing anticipation of a trade deal with China and a more dovish Fed have helped improve investor sentiment. Also playing into the calculus are signals of expansionary policy in Europe, where a recession in Italy and a near-recession in Germany have key players considering additional measures to avoid more systemic malaise. Encouraging policy developments are reassuring investors that slowing growth this year will not foretell something more sinister in 2020. Such a narrative helps explain the surge in stocks this year against a backdrop of declining earnings expectations that more typically results in just the opposite.

Growing but Slowing

It’s not that earnings have disappointed; approximately 80 percent of the S&P 500 has reported, with ~75 percent beating bottom-line expectations and roughly half delivering upside to sales estimates. Nevertheless, a later-cycle economy featuring rising wages, a strong dollar (now up almost 2 percent year-to-date) and cost pressures from tariffs have combined to dampen profit margins and reduce earnings expectations, as the chart below shows.


Source: FactSet

If current estimates hold, earnings for the broader market will rise by about 5 percent this year, substantially slower than the 25 percent growth we are expecting for 2018, pending the last of earnings reports being delivered now. At 16x anticipated profit, stocks are neither cheap nor expensive, but set against a backdrop of encouraging policy developments and more dovish monetary policy, investors seem to be viewing the glass as half full. With bullish sentiment on the rise, technicians will note that the S&P 500 closed the week above its 200-day moving average for the first time since November.

High and Dry

This is how commercial real estate developers and housing speculators felt after learning that Amazon would abandon its previously announced plan to open a second headquarters in the New York City borough of Queens. Opposition from local politicians made the company think better of its long-term expansion in the Big Apple, and in the process stung those who bid up the price of office buildings and condominiums in anticipation of heightened demand and pricing. Following this announcement and in the wake of salacious headlines about its CEO Jeff Bezos, Amazon shares underperformed.

Our Takeaways from the Week

  • Stock continued their climb, rising another 2.5 percent, and closing above key technical levels

  • Fourth quarter earnings season is just about finished, with retailers being the last group to report over the next couple weeks