Weekly Market Commentary April 15, 2019

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The S&P 500 gained 0.6% last week and reached an all-time high (when dividends are included). A few banks reported solid earnings and indicated loan demand remains positive. Investors cheered both developments. The global MSCI ACWI gained 0.5% based on strength in global stocks. The Bloomberg BarCap Aggregate Bond Index dropped 0.1%.

Key Points for the Week

  • Earnings season kicked off on Friday.
  • Expectations are for an earnings decline this quarter and modest growth this year.
  • The S&P 500, when including dividends, eclipsed the high set in September 2018.

No major breakthroughs were achieved between the U.S. and China or on Brexit. The inflation outlook remains tame. The Consumer Price Index rose 0.4%, but volatile energy and food prices caused the increase. Excluding these more volatile elements, inflation rose only 0.1%. Companies reporting earnings will be a key focus this week.


Earnings Season

Earnings season is upon us. A few key banks kicked it off on Friday with generally positive results. Earnings growth is expected to slow in 2019. Current expectations are for an earnings decline of 4.3% in the first quarter and modest growth later in the year. Last year, earnings grew rapidly because the corporate tax cut slashed the amount many corporations paid in taxes.

The first quarter’s earnings weakness is attributable to an earnings decline in technology and energy stocks, which earned less because oil prices have fallen over the last year. U.S. corporations also earn a large share of their profits overseas, and the dollar’s strength makes foreign profits worth less when converted into dollars.

Margin pressure is also a potential risk to investments. S&P 500 companies earned the highest margins on record in 2018, but labor costs are posing a threat. The strong employment growth in the U.S. has started to fuel wage increases that are higher than the rate of inflation. For workers, this is tremendous news. For corporations, this means they will face higher costs. Labor accounts for roughly 60% of all corporate costs, so increasing wages can reduce the bottom line substantially.

These factors are affecting earnings already. According to FactSet, corporations are mentioning foreign exchange and labor costs as the top two factors negatively affecting earnings this quarter or potentially affecting them later this year.

The next couple years will likely see a decreased emphasis on fiscal and monetary policy and more emphasis on company fundamentals. Assuming the Fed remains on hold, earnings growth will take on a greater role determining whether markets move higher or lower.

Fun Story

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