Linda S. Parenti, CFA
President & Chief Investment Strategist
The old saying, “stocks climb a wall of worry,” certainly seems to be holding true. The S&P 500 delivered an outstanding 3.7% in total return for July, and the equity index has continued to edge higher into August. In fact, it is once again near the all-time closing high it reached in January. In addition, market volatility has recently dropped and is back down to the levels we enjoyed much of last year. Yet, sentiment indicators that measure how investors feel towards the markets have been showing only modest confidence. Sentiment numbers have been backed by action as well. Fund flows going into bond mutual and exchange traded funds have been far outpacing flows into equity funds for months. I believe the disconnect may in part be due to the trade and tariff concerns that continue to weigh heavy on the minds of investors. It would seem that company executives also are voicing worries over trade issues. According to the Bespoke Investment Group, there has been a significant increase in the number of companies discussing tariffs during their second quarter conference calls with analysts versus the previous quarter.
Still, Wall Street participants seem to be responding positively to second quarter earnings and sales results. With 454 of the S&P 500 having reported, we are nearly finished with the second quarter earnings season. Following a very strong first quarter, estimates were boosted for second quarter profits. Even with the higher bar, 80% of companies reporting so far have bested those previously raised expectations. It is also worth noting that more companies have increased their earnings guidance for future quarters versus lowered when reporting.
A good measure of the quarter’s impressive 26% earnings growth is due to tax reform and a continuing surge in energy sector earnings. However, this makes seeing nearly 11% sales growth especially important, because it more clearly confirms the positive impact coming from our strong domestic economy. The advance estimate for second quarter gross domestic product (GDP) growth came out at 4.1%. This is a better rate of growth than the U.S. has seen in nearly four years. Further evidence of our healthy economy is solid employment. The unemployment rate stands at only 3.9% and jobless claims remain near record lows.
Headline risk from trade concerns raises uncertainty, which typically results in higher market volatility. However, tariffs have been in place for many years between us and our trading partners. Tariffs reduce growth and additional burdens are a risk, especially to those industries and geographic areas specifically being targeted. Nevertheless, our overall economy should be resilient enough to withstand the impact of potentially higher tariffs as well as the future interest rate hikes expected from the Federal Reserve.
RISKS AND IMPORTANT CONSIDERATIONS
Views and opinions expressed here are for informational and educational purposes only and may change at any time based on market or other conditions or may not come to pass. This material is not a solicitation to buy or sell securities and should not be considered specific legal, investment, or tax advice. The information provided does not consider the objectives, financial situation, or particular needs of any specific individual. All investments carry a degree of risk and there is no certainty that an investment will provide positive performance over any stated period. Equity investments are subject to company specific and market risks. Equities may decline in response to adverse company news, industry developments, or economic data. Fixed income securities are subject to market, credit, and interest rate risks. As interest rates rise, bond prices may fall. Past performance is no guarantee of future results.