This weekly report presents insights from our Global Investment Management team.
The summer heat and some hot earnings reports seem to be stoking the fire under the stock market. The S&P 500 Index set a fresh record high yesterday, closing at 2,477 and bringing the gauge’s year-to-date advance to 11.88%.
Earnings season is back in swing as second-quarter results have been flooding in and over half of the companies in the S&P will have reported by the end of this week. So far, an aggregate of reports by Bloomberg shows an average of 3.5% growth in sales and 7.5% growth in earnings compared to last quarter, which had already showed robust expansion. The same source also shows analysts are forecasting double-digit earnings growth this quarter, but slowing to single-digits in the third quarter. For some of those multi-national companies, currency may end up being a tailwind.
The U.S. dollar fell to its lowest level against the euro since 2015 as mixed economic data and political uncertainty weighed on its strength. ECB President Mario Draghi recently announced that tapering of the central bank’s stimulus would be a topic of discussion late this year, which added fuel to the fire for the euro rally. European stocks fell on Monday with the MSCI Europe Index declining 24 basis points. Despite a bright spot in France’s CAC 40 Index gaining 20 basis points, the U.K.’s FTSE 100 Index was down over a percent.
Brexit negotiations may have made some progress as delegates sat for the second round of discussions in Brussels last week. Talks seem to be headed toward a softer Brexit as the U.K. finally relinquished on a key topic of debate. Citizens of the EU will have free movement for up to four years after Britain officially leaves the union. Nevertheless, the EU continues to demand a €100B divorce fee, which remains a contested topic. Parallel with the negotiations, the U.K. cabinet is searching for trade agreements with other countries; however, the U.K. is unable to sign any deals until the country officially leaves the EU in March 2019.
We believe European risks have subsided significantly and see higher potential returns there compared to other developed markets. The U.S. political arena continues to be a key risk as a lack of cooperation has led to gridlock over the tax reform and infrastructure spending that domestic markets have been anxiously awaiting. In our view, the Fed’s balance sheet policy announcement that will likely occur in September will be an important factor in the advance of the financial markets over the medium term. U.S. stock markets could continue to slowly climb until a large enough catalyst occurs, but markets have been surprisingly resilient to most shocks that we have seen in recent years.
Investing involves risk, including the possible loss of principal and fluctuation in value. Economic and market forecasts reflect subjective judgments and assumptions, and unexpected events may occur. Therefore, there can be no assurance that developments will transpire as forecasted. The information in this newsletter is for informational purposes only and is not intended to be investment advice or a recommendation. Nothing in this newsletter should be interpreted to state or imply that past results are an indication of future performance.
Fixed income securities are subject to interest rate, inflation, credit and default risk. The bond market is volatile. As interest rates rise, bond prices usually fall, and vice versa. The return of principal is not guaranteed, and prices may decline if an issuer fails to make timely payments or its credit strength weakens.
International securities involve additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability. These risks are greater in emerging markets.
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