Market Update | April 26, 2018

Macro View

Daily Insights

  • Excellent earnings season thus far, by the numbers. First quarter earnings results have been excellent so far, with about 30% of S&P 500 Index companies having reported. Index-level earnings are tracking to a 22% year-over-year increase, well above the 18.5% increase reflected in Thomson-tracked consensus as of April 1. Revenue growth is tracking to a solid 7.7% year-over-year increase above the April 1 number (+7.3%). Perhaps most impressive, estimates for the rest of the year haven’t budged despite their historical tendency to drop during earnings season and the high bar that has been set. Bottom line, despite concerns that this may be as good as it gets, our outlook for corporate profits remains very positive, which we expect to support solid stock market gains in 2018.
  • International developed equities have outperformed slightly year to date. The weak dollar explains virtually all of the outperformance vs. the S&P 500. Still, international diversification has generally helped buoy portfolios this year, which has not been the case in recent years and is encouraging. Rising interest rates and tightening monetary policy are risks for emerging market (EM) equities and have prevented EM from outperforming U.S. equities year to date; however, these are risks we are comfortable taking given attractive valuations and the favorable economic growth outlook.
  • No change to ECB policy or outlook. European Central Bank (ECB) Chief Mario Draghi made no change to ECB policy today, as expected. However, more important for markets was the possibility of hints that tapering of quantitative easing may be delayed. In Mr. Draghi’s post-statement press conference, he characterized the European economy as solid but moderating, consistent with our assessment based on recent data. He also reiterated the central bank’s confidence that inflation will converge toward its target. The balanced comments (though some saw them as tilting dovish based on the market reaction) seemed to thread the needle between leaving the door open for a more dovish stance down the road if economic conditions deteriorate, possibly due to trade tensions or a strong euro, while also reminding markets that the plan remains for an exit to quantitative easing this fall.
  • WTI crude oil has a lot going for it. We maintain our neutral view on oil and the energy sector, but recent strength and an improved fundamental outlook are not lost on us, and we can see the upside case for a break above $70 per barrel. Demand remains solid, geopolitical risk is elevated and rising, the supply glut has mostly been worked off, and technical analysis tells us crude prices have upside into the mid-$70s; though the possibility of a supply response in the United States to those higher prices keeps us from a more bullish view on the commodity and the sector.
  • Our updated Recession Watch Dashboard is still signaling low odds of a recession. We did move the yield curve assessment to yellow (on watch) as the curve has flattened. However, as we wrote in our Weekly Market Commentary this week, while important to monitor, we think it’s too early to worry much about this signal, and the spread narrowing amid rising rates is less worrisome than if it were accompanied by falling rates. View the updated Recession Watch Dashboard.
  • Jobless claims fall to lowest levels since 1969. The most recent weekly jobless claims report showed a drop of 24,000 to a seasonally adjusted 209,000; economists were expecting 228,000. While initial weekly numbers can be noisy, the downward trend in claims is not new, and the less volatile four-week moving average of claims also fell (to 229,250). Signs continue to show that the labor market is gradually tightening and near full employment.

Monitoring the Week Ahead

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