This weekly report presents insights from our Global Investment Management team.
This week was fairly reminiscent of the last few, marked by a flurry of earnings reports overlaid with increasing political pressures both domestically and abroad.
Many of the largest U.S. companies have reported results with Apple – the largest in market capitalization terms – releasing less than stellar results stemming from a decrease in iPhone sales. Shares slid in after-hours trading, down from yesterday’s 52-week high of $147.51 and had dropped more than 2% at the open. Prior to the miss in phone sales, investor confidence had been building on the backdrop of a new upgrade release; however, it seems as though many consumers have delayed purchasing the newer version as Apple reported sales of 50.8 million iPhones for the quarter versus 51.2 million for same period a year ago. The decline did overshadow what was otherwise a win for the tech giant with earnings per share coming in at $2.1 versus estimates at $2.02, according to Bloomberg, resulting in shares recovering from lows in the morning session.
Although Apple may have disappointed some investors, companies within the S&P 500 in aggregate have held up to the hype placed on the domestic equity market this year. As of Wednesday morning, 360 companies had released earnings with 74.4% of those reporting positive earnings surprises over estimates, based on Bloomberg data. Year-over-year change in earnings, thus far, shows a 14.2% increase on a share-weighted basis. Despite the mixed results from Apple, technology has been a bright spot among sectors, reporting an 18% increase in year-over-year earnings that has helped to lift some domestic markets to new highs.
However, the U.S. economy did not appear to push higher alongside stocks and posted a fairly weak GDP report for the first quarter. The domestic economy grew just 0.7%, while inflation climbed 1.8% in March. The international picture isn’t all that more rosy as the French elections on May 7th approach and the possibility remains for a surprise Le Pen victory. This would add further uncertainty to the global growth equation based on her proposed policies. Additional risks stemming from U.S. fiscal policy along with increasing tensions on the Korean peninsula will also have to be evaluated by investors to determine if the global growth trend stays intact or falters.
With this in mind, the Fed may need to reevaluate the prospective hike in June, which shows a 71% probability according to implied fed funds futures compiled by Bloomberg. While we still consider the hike likely based on the first quarter weakness being mostly transitory, the markets might be overestimating the chance. Adding to the uncertainty, the federal government debate over the debt ceiling may come to a head this fall and we believe the Fed may become more cautious based on fiscal policy changes. Our base case continues to include interest rates rising in the second half of the year, and we remain marginally underweight duration in our fixed income strategies. We are holding our overweight to equities for the time being as earnings continue to strengthen and the probability of a global recession is still low.
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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