The S&P 500 continues to grind higher, due a strong 2Q earnings season that has surprised on the upside. With 80% of S&P 500 companies having reported results up to this point, S&P 500 2Q earnings are now expected to grow by 10.2% for the quarter versus estimates of 6.5% on June 30. Also, sales growth
is expected to finish up 5.2%, with the largest number of companies beating on the top line since at least 2008 (according to FactSet). Margins have also expanded, and full year 2017 S&P 500 earnings estimates are up to $131.26 (would be 10.5% growth y/y).The stronger than expected earnings has relieved political disappointment out of D.C. thus far, with market participants largely ignoring White House turnover and health care failure. While Republicans may make another attempt on health care after the August recess, investors will likely pay closer attention to budget resolution and the path of tax reform this Fall. On Monday, Congress announced a timeline for tax changes by year end.
Technical: Overall, technical trends remain healthy; however there are some minor divergences. The S&P 500 Equal-Weight Index and Small Cap index have not been able to make relative strength gains during the market’s advance this year, and broke to new relative lows today. This suggests a lack of market breadth beneath the surface and could signal some near term consolidation for the cap-weighted S&P 500. However, with numerous levels of technical support nearby (and an improving economic and earnings backdrop), we would view pullbacks opportunistically.
Macro Economic growth continues to look healthy. US 2Q GDP was reported at 2.6%, and estimates for the full year suggest growth around 2.2% (up from 1.5% last year). Also, manufacturing readings came in line with July estimates and remain solid. Looking forward, July change in nonfarm payrolls is reported tomorrow and consensus estimates are for a 180K increase. Global economic improvement also remains supportive, and has sustained its momentum (chart on right), based on PMI data out over the past week.
Economic data reported in the past week (actual vs estimate):
– GDP Annualized q/q (2Q A): 2.6% vs 2.7%, 1.2% prior
– Personal Consumption (2Q A): 2.8% vs 2.8%, 1.9% prior
– Core PCE q/q (2Q A): 0.9% vs 0.7%, 1.8% prior
– U of Michigan Sentiment (Jul F): 93.4 vs 93.2, 93.1 prior
– Chicago PMI (Jul): 58.9 vs 60.0, 65.7 prior
– Pending Home Sales m/m (Jun): 1.5% vs 1.0%, -0.7% prior
– Pending Home Sales y/y (Jun): 0.7% vs 0.7% prior
– Dallas Fed Manf. Activity (Jul): 16.8 vs 13.0, 15.0 prior
– Personal Income (Jun): 0.0% vs 0.4%, 0.3% prior
– Personal Spending (Jun): 0.1% vs 0.1%, 0.2% prior
– PCE Core m/m (Jun): 0.1% vs 0.1%, 0.1% prior
– PCE Core y/y (Jun): 1.5% vs 1.4%, 1.5% prior
– Markit US Manufacturing PMI (Jul F): 53.3 vs 53.2, 53.2 prior
– ISM Manufacturing (Jul): 56.3 vs 56.5, 57.8 prior
– Construction Spending m/m (Jun): -1.3% vs 0.4%, 0.3% prior
– Initial Jobless Claims (Week): 240k vs 243k, 245k prior
– Markit US Services PMI (Jul F): 54.7 vs 54.2, 54.2 prior
– Markit US Composite PMI (Jul F): 54.6 vs 54.2 prior
– ISM Non-Manf. Composite (Jul): 53.9 vs 56.9, 57.4 prior
– Factory Orders (Jun): 3.0% vs 3.0%, -0.3% prior
– Durable Goods Orders (Jun F): 6.4% vs 0.0%, 6.5% prior
– Durables Ex Transportation (Jun F): 0.1% vs 0.2% prior
Disclaimers and Disclosures
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General Disclosures: Any strategies discussed in this presentation, including examples using actual securities and price data, are strictly for illustrative and educational purposes only and are not to be construed as an endorsement, recommendation, or solicitation to buy or sell specific securities or strategies.
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