07/28/2016
Equities Outlook, Q2 Earnings Season & Financial Planning

Equities Outlook, Q2 Earnings Season & Financial Planning

US equities have soared to record levels as investors now view the assets class as a safe prospect against a backdrop of increasing European political and economic risks, a far cry from the global rout seen early in the year.

Q2 Earnings Season & Recession Concerns
After suffering outflows totaling roughly $83 billion in the first half of 2016, US equity funds saw inflows of $12 billion in the second week of July alone, where both the S&P 500 and Dow Jones rose to a 15-month peak on July 14th.

Once widely-held fears of a US recession have all but disappeared as a result of improved economic data, including June’s non-farm payroll report of 287,000 new jobs, easily outpacing a forecast of 175,000.

Federal Reserve Won’t Rock the Boat
One reason behind the bounce is a more accommodating stance from the Federal Reserve, which reduced its plan for four rate hikes throughout the year down to two.

US bond yields have hit record lows, pushing many investors toward equities, particularly bond-proxy sectors including telecoms and utilities. The yield on benchmark 10-year US Treasuries closed under 1.4% at the start of July, the lowest value on record.

Some Equities Overvalued?
Some, however, are concerned with the level of support for the rising equity markets. They see economic indicators pointing to the US economy being in a late stage of the cycle, with slowdowns possible in 2016, and earnings figures not substantial enough to back up the high valuations.

Of the companies in the S&P 500 that have reported Q2 earnings, 34% reported actual EPS equal to or below mean EPS estimates. Six of ten sectors are reporting a year-on-year decline in earnings, led by the energy, information technology, and materials sectors.

If earnings fall overall in the quarter, it will mark the first instance US corporates suffered five consecutive quarters of year-on-year declines since the financial crisis.

Weak Dollar, Forex & Commodities
Other experts, however, believe that while Q1 earnings were the low point of the year, Q2 earnings will beat industry forecasts of -5%. The 2% drop in the dollar’s value against a wide array of currencies since the start of the year has created a better trading environment for businesses.

Any increased stability in foreign exchanges and commodity markets could improve Q3 and Q4 earnings to show positive year-on-year growth. If that happens, the 2017 outlook becomes much brighter.

Sector Performance

As of July 28th:

  • Energy Select Sector Index TR is up over 12% on the year, but down roughly 2% in the last month
  • Financial Select Sector Index TR is up 0.57% on the year, rising 3.73% in the last month
  • Health Care Select Sector Index TR is up over 5% on the year and up 4.62% in the last month
  • Consumer Staples Select Sector Index TR is up 9.18% on the year, down 1.24% in the last month
  • Industrial Select Sector Index TR is up 11.11% on the year, rising 3.96% in the last month

As we pass the midpoint of 2016, markets are showing surprising resilience given the headline-grabbing political and economic turmoil across the globe. For the broadest universe of investment options, world-class financial resources, investment advice, portfolio monitoring, and wealth management from experienced financial planners, contact OptiFour Integrated Wealth Management today!

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