3Q17 earnings season is in full swing with 231 of the S&P 500 companies having reported thus far and another 152 to announce through next Friday. In aggregate, S&P 500 companies have reported 7.8% earnings growth on sales growth of 5.0% this quarter. The average S&P 500 company has traded down -0.5% on their earnings report, with Technology, Materials, Utilities, and Financials being the outperforming sectors.
The path of tax policy changes also remains a significant influence on equity markets. Today, the House approved last week’s Senate budget. Approval allows the two chambers to skip the reconciliation process, which is intended to speed up the legislative process. The next step is for the House Ways and Means Committee to unveil their tax plan (some estimate as early as next week), but the process remains a very fluid situation.
On the monetary policy front, the odds of another Fed rate hike this year have ticked slightly higher to 84%. Also, the ECB (European Central Bank) announced a taper in its QE program today, although investor takeaways were dovish. In reaction, the U.S. dollar strengthened (breaking above short-term resistance) and the U.S. 10 year yield continued its move higher (following its break out above short-term resistance this week).
Technical: We believe that the index is acting as if it will consolidate its recent gains as short-term indicators are starting to inch down after holding at overbought levels for an extended period of time. Also, despite the S&P 500 hitting new highs, there has been an interesting pickup in the number of stocks trading to new 52 week lows over the past week. If the S&P 500 were to begin a consolidation or normal pullback period, there are numerous support levels nearby. We would use these areas as buying opportunities given the solid economic and fundamental backdrop. Potential support levels: ~2508 (recent breakout and 50 DMA), 2490 (previous breakout), 2462 (trend line of April – August lows), 2417 (200 DMA), 2400 (horizontal support from March 1st breakout – would be 18.7x P/E on current earnings).
In general, U.S. housing data improved in September, although the readings can be volatile from month to month. September existing home sales rose 0.7% to 5.39M, above expectations of a -0.9% contraction to 5.30M. Similarly, new home sales rose 18.9% to 667k, above estimates of a -1.1% contraction to 554k, although pending home sales remained unchanged m/m vs estimates of a 0.5% increase. Durable goods orders also showed improvement, rising 2.2% in September. Furthermore, October preliminary PMI readings were released for the U.S., Japan, and Eurozone over the past week and overall suggest continued momentum in the global economy. The U.S. was actually a standout with manufacturing, services, and composite PMI all rising above expectations.
Economic data reported in the past week (actual vs estimate):
Existing Home Sales (Sep): 5.39M vs 5.30M, 5.35M prior
Existing Home Sales m/m: 0.7% vs -0.9%, -1.7% prior
Markit US Composite PMI (Oct P): 55.7 vs 54.8 prior
Markit US Manufacturing PMI (Oct P): 54.5 vs 53.4, 53.1 prior
Markit US Services PMI (Oct P): 55.9 vs 55.2, 55.3 prior
Durable Goods Orders (Sep P): 2.2% vs 1.0%, 2.0% prior
Durables Ex Transportation (Sep P): 0.7% vs 0.5%, 0.7% prior
FHFA House Price Index m/m (Aug): 0.7% vs 0.4%, 0.4% prior
New Home Sales (Sep): 667k vs 554k, 561k prior
New Home Sales m/m: 18.9% vs -1.1%, -3.6% prior
Initial Jobless Claims (Week): 233k vs 235k, 223k prior
Continuing Claims (Week): 1893k vs 1890k, 1896k prior
Wholesale Inventories m/m (Sep P): 0.3% vs 0.4%, 0.8% prior
Pending Home Sales m/m (Sep): 0.0% vs 0.5%, -2.8% prior
Pending Home Sales y/y (Sep): -5.4% vs -4.2%, -3.3% prior
Nikkei Japan PMI Manufacturing (Oct P): 52.5 vs 52.9 prior
Markit Eurozone Composite PMI (Oct P): 55.9 vs 56.5, 56.7 prior
Markit Eurozone Manufacturing PMI (Oct P): 58.6 vs 57.8, 58.1 prior
Markit Eurozone Services PMI (Oct P): 54.9 vs 55.6, 55.8 prior
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