Short-term Summary: 

Following its break out to new highs on September 11, the S&P 500 has made 13 new closing highs over the past month in what has been a fairly steady climb higher. Over the past week, the index has basically moved sideways; and in the process, short term indicators have held in overbought territory- a characteristic of a strong market. Also, the semiconductors and transports broke out to new highs, indicative of solid market momentum. One technical divergence that has not improved to the degree we would expect is relative strength of the S&P 500 equal weight index. 

3Q17 earnings season kicked off this week with several high profile names reporting results; and next week, 50 more S&P 500 companies are set to report. Earnings estimates for the quarter have been revised down and now reflect 2.2% earnings growth in the quarter. It is common for estimates to be revised lower into the quarter, only for actual results to beat (on average by ~2.9%). The sharpest negative earnings revisions came from the insurance names following the recent hurricanes. Nevertheless, S&P 500 earnings are set to regain their strong growth in 4Q (current estimates are for 10.9% growth) and continue into 2018 (~10% growth expected in 1Q18 and 2Q18). 

Technical: At some point, we expect the index will consolidate its recent advance. When that happens, there is plenty of technical support nearby. The ~2490-2500 area looks to us like the initial level of good support, and coincides with the 50 DMA. We think a deeper pullback could see the S&P 500 reach the 2,402 level, which coincides with the index’s 200 DMA, and is near its March-May highs and June-Aug lows. Also, the VIX is back to very low levels; and although not a great timing indicator, it does suggest that some consolidation in the short term is likely warranted. 

We would suggest using any such potential pullbacks as buying opportunities as long as the pillars of this market remain in place (a healthy global economy, earnings growth, low interest rates, and fairly loose monetary policy around the world) as they remain supportive of equities longer term. 


Nonfarm payrolls contracted by 33K in September (much lower than reduced estimates), with hurricane effects being the likely cause. Within the report, the unemployment rate ticked lower to 4.2% and wage pressures built up. Average hourly earnings grew 0.5% m/m and 2.9% y/y in September. Also, September PPI showed a slight pick up from August, with Core PPI up 0.4% m/m (vs estimates of 0.2%) and 2.2% y/y (vs estimates of 2.0%). In the FOMC Minutes (from September 20 meeting) released this week, the Fed noted that the path of inflation remains a key question- whether the recent softening is transitory or likely to persist for longer. September CPI is reported tomorrow morning, and market participants will be watching closely. Expectations are for September CPI to rise to 2.3% y/y from 1.9% y/y in August, and for core CPI to rise 1.8% y/y from 1.7%. Within the Fed minutes, the majority of members also believed that they will likely raise short-term interest rates again this year. Current implied odds of another Fed rate hike this year have remained at ~77% (up from 22% on September 7, the day before the three month extension to the debt limit). 

Economic data reported in the past week (actual vs estimate): 


Change in Nonfarm Payrolls (Sep): -33K vs 80K, 169K prior
Average Hourly earnings m/m (Sep): 0.5% vs 0.3%, 0.1%
Average Hourly Earnings y/y (Sep): 2.9% vs 2.6%, 2.5% prior
Unemployment Rate (Sep): 4.2% vs 4.4%, 4.4% prior
Wholesale Inventories m/m (Aug F): 0.9% vs 1.0%, 1.0% prior
NFIB Small Business Optimism (Sep): 103.0 vs 105.0, 105.3 prior
MBA Mortgage Applications (Week): -2.1% vs -0.4% prior
FOMC Minutes (Sep 20 meeting)
PPI Final Demand m/m (Sep): 0.4% vs 0.4%, 0.2% prior
PPI Final Demand y/y (Sep): 2.6% vs 2.6%, 2.4% prior
PPI Ex Food and Energy m/m (Sep): 0.4% vs 0.2%, 0.1% prior
PPI Ex Food and Energy y/y (Sep): 2.2% vs 2.0%, 2.0% prior
Initial Jobless Claims (Week): 243k vs 250k, 258k prior
Industrial Production m/m (Aug): 1.4% vs 0.6%, 0.3% prior
Industrial Production y/y (Aug): 3.8% vs 2.6%, 3.6% prior
Leading Index (Aug P): 106.8 vs 107.1, 105.2
Core Machine Orders m/m (Aug): 3.4% vs 1.0%, 8.0% prior
Core Machine Orders y/y (Aug): 4.4% vs 0.7%, -7.5% prior
Caixin China PMI Composite (Sep): 51.4 vs 52.4 prior
Caixin China PMI Services (Sep): 50.6 vs 52.7 prior ​
​Source: Bloomberg, FactSet, RJ Equity Portfolio & Technical Strategy​

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