With 3Q17 earnings season largely complete, tax policy continues to dominate headlines. Another focus this week has been a shift in risk sentiment towards a risk-off trade as the yield curve has seen some flattening and junk bond performance diverges from equities. While macro data continues to be positive, we view this shift in risk appetite as normal profit taking and a shift into more defensive names. While we could continue to see some volatility as the tax debate lingers and continuation of yield curve flattening, we would use the dip in areas such as Financials and Energy to be selective.
On the earnings front, 94% of S&P 500 companies have reported 3Q17 results thus far. 67% of S&P 500 companies have beaten on the top line and 77% have beaten on the bottom line for aggregate reported sales growth of 6.1% and earnings growth of 6.3%. Looking forward, S&P 500 earnings estimates have remained solid with 4Q17 and 1Q18 both reflecting earnings growth of 10.0% and 10.2%, respectively.
Economic conditions remain healthy. This week, retail sales and acceleration in core inflation are supportive of a rate hike; the implied probability of another Fed rate hike in December remains at ~92%. It is worth noting that the yield curve continued to flatten over the past week, although it remains far from concerning at this point.
Technical: We believe the Financials and Energy may be timely on a pullback. As of this writing, the Energy sector recently saw the 50 day moving average (DMA) cross its 200 DMA. With the S&P 500/Energy sector sitting near its 200 DMA, we believe this should provide a nice area of support. As mentioned last week, Financials look timely with the the S&P500/Financials having pulled back to its 50 DMA, which we see as a nice area of support. Moveover, the recent pullback has been on weak volume.
This week’s economic data has been supportive of a December rate hike with retail sales coming in better than expected and core inflation accelerating for the first time since January. Weekly jobless claims continue to be near a long-term low, coming in at 1,860k vs. consensus of 1,900k. October core CPI saw its first monthly acceleration since January (up 1.8% y/y vs. 1.7% last month).
Economic data reported in the past week (actual vs estimate):
University of Michigan Sentiment (Nov): 97.8 vs. 100.8; 100.7 prior
NFIB Small Business Optimism (Oct): 103.8 vs. 104.0; 103.0 prior
PPI Final Demand (m/m) (Oct): 0.4% vs. 0.1%; 0.4% prior
MBA Mortgage Applications (Week): 3.1% vs. 0.0% prior
CPI (m/m) (Oct): 0.1% vs. 0.1%; 0.5% prior
Real Avg. Hourly Earnings (y/y) (Oct): 0.4% vs. 0.7% prior
Empire Manufacturing (Nov): 19.4 vs. 25.1; 30.2 prior
Retail Sales (m/m) (Oct): 0.2% vs. 0.0%; 1.6% prior
Business Inventories (Sep): 0.0% vs. 0.0%; 0.7% prior
Initial Jobless Claims (Week): 249k vs. 235k; 239k prior
Continuing Claims (Week): 1,860k vs. 1,900k; 1,901k prior
Philadelphia Fed Business Outlook (Nov): 22.7 vs. 24.6; 27.9 prior
Import Price Index (m/m) (Oct): 0.2% vs. 0.4%; 0.7% prior
Export Price Index (m/m) (Oct): 0.0% vs. 0.4%; 0.8% prior
Industrial Production (m/m) (Oct): 0.9% vs. 0.5%; 0.3% prior
Capacity Utilization (Oct): 77.0% vs. 76.3%; 76.0% prior
NAHB Housing Market Index (Nov): 70 vs. 67; 68 prior
Retail Sales (y/y) (Oct): 10.0% vs. 10.5%; 10.3% prior
Industrial Production (y/y) (Oct): 6.2% vs. 6.3%; 6.6% prior
Industrial Production (m/m) (Sep): -0.6% vs. -0.6%; 1.4% prior
Trade Balance (Sep): 25.0b vs. 21.0b; 21.6b CPI (m/m) (Oct): 0.1% vs. 0.1%; 0.4% prior
Japan PPI (m/m) (Oct): 0.3% vs. 0.1%; 0.2% prior GDP (q/q) (3Q): 0.3% vs. 0.4%; 0.6% prior
Industrial Production (m/m) (Sep): -1.0% vs. -1.1% prior
Source: Bloomberg, FactSet, RJ Equity Portfolio & Technical Strategy
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