Earnings to push the S&P higher

by: , Portfolio Strategist, New York Life Investment Management

Heading into the peak weeks of the second quarter, earnings season and the S&P 500 are challenging their January highs. Now, investors are wondering if these earnings releases will be enough to lift the equity markets to new record highs.

The S&P 500 is poised to post its strongest annual, non-recession earnings growth since 2003 and 2004.

  • For the second quarter in a row, earnings per share (EPS) looks poised to be 20% higher than this time last year.
  • Forty seven S&P 500 companies have issued positive EPS guidance – the second most since 2006.
  • Sales and operating income growth is robust.
  • All eleven sectors are reporting (or are projected to report) year-over-year growth in revenues. Revenues are expected to grow at 9%.

Sources: Factset, as of 7/18/18. Past performance is no guarantee of future results. Earnings estimates are only estimates computed by FactSet and can vary. An investment cannot be made in an index.

What to watch

Company commentary will be worth watching this quarter. Executives are likely to provide more details around where they plan on spending cash freed up from growing revenues, changes in the tax code, and repatriation. Three factors may put downward pressure on margins and therefore will be important to watch in this earnings season:

  1. Foreign exchange: The dollar has experienced significant volatility over the past year – moving 6% higher over the last three months alone. Many S&P 500 companies have indicated that dollar volatility has had either a negative impact on earnings or revenues in Q2, or is expected to have a negative impact on earnings and revenues in future quarters.
  2. Operating costs: As global demand has ramped up, so has the cost of shipping and logistics. When business owners also factor in the effects of a tighter labor market (higher wages), some businesses are experiencing downward pressure on margins.
  3. Trade wars: Very few companies have noted an effect from tariffs, but some companies using tariffs as an excuse for weak performance may garner more attention this season.

Bottom line

The earnings may be enough for the equity markets to forget about the headline risk and push to new highs. That said, record earnings are unlikely to be distributed equally across all companies. As a result, we expect earnings dispersion could be quite high.

Opinions expressed are current opinions as of the date appearing in this material only. The information and opinions contained herein are for general information use only. New York Life Investments does not guarantee their accuracy or completeness, nor does New York Life Investments assume any liability for any loss that may result from the reliance by any person upon any such information or opinions. Such information and opinions are subject to change without notice, and are not intended as an offer or solicitation with respect to the purchase or sales of any security or as personalized investment advice. There can be no guarantee that any projection, forecast, or opinion in these materials will be realized. Past performance is no guarantee of future results.

About Risk

All investments are subject to market risk, including possible loss of principal. There is no assurance that the investment objectives mentioned will be met. Diversification cannot assure a profit or protect against loss in a declining market.

Treasury Securities are backed by the full faith and credit of the United States government as to payment of principal and interest if held to maturity.

The 10-year Treasury note is a debt obligation issued by the United States government with a maturity of 10 years upon initial issuance. A 10-year Treasury note pays interest at a fixed rate once every six months, and pays the face value to the holder at maturity.

Earnings per share (EPS) is the portion of a company’s profit allocated to each outstanding share of common stock. Earnings per share serves as an indicator of a company’s profitability.

The S&P 500 Index is widely regarded as the best single gauge of large-cap US equities. The index includes 500 leading companies and captures approximately 80% coverage of available market capitalization.

New York Life Investments is a service mark and name under which New York Life Investment Management LLC does business. New York Life Investments, an indirect subsidiary of New York Life Insurance Company, New York, New York 10010, provides investment advisory products and services. NYLIFE Distributors LLC is located at 30 Hudson Street, Jersey City, NJ 07302. NYLIFE Distributors LLC is a Member FINRA/SIPC.

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Robert Serenbetz

Portfolio Strategist, New York Life Investment Management

Robert Serenbetz is the Portfolio Strategist with New York Life Investment Management’s Strategic Asset Allocation & Solutions (SAS) Group. He contributes to investment thought leadership and communication efforts across New York Life Investment Management

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