Global Equity Strategy
Weekly discussion of recent equity market action with equity sector highlights and what it may mean for investors.
Third-Quarter Earnings Inching Into Positive Territory
- With fewer than 25 percent of S&P 500 Index companies reporting earnings to date, more than 75 percent of reporting companies have exceeded consensus earnings estimates.
- We anticipate that this earnings season will end the four quarters of year-over-year S&P 500 Index earnings declines.
What it may mean for investors
- We continue to expect easier earnings comparisons as we move toward 2017.
- We continue to favor sectors that have the potential to benefit from late-cycle improvement in capital spending.
Thus far, fewer than 25 percent of S&P 500 constituent companies have reported earnings for the third quarter of 2016.
The S&P 500 Index had generated four consecutive negative quarterly earnings comparisons through the second quarter of 2016. For the third quarter, to date, 75 percent of reporting companies have registered earnings results ahead of street expectations. The overall year-to-year change in aggregate third-quarter S&P 500 Index earnings has moved into the positive range (+0.6%).
This season appears likely be the one to end four quarters of year-to-year earnings declines that were heavily impacted by lower oil prices (and Energy-sector earnings). We have been anticipating that Materials-sector earnings should move toward favorable comparisons by year-end—and that the Energy Sector would continue to offer easier comparisons as we move toward and into 2017. At the same time, however, the equity markets have already appeared to anticipate better earnings comparisons in recent months. Thus, the near-term stock market impact from earnings season could remain muted during this period of election noise and ongoing monetary- and fiscal-policy uncertainty.
Although it is early in earnings season, we have thus far seen roughly 61 percent of reporting companies registering revenue growth that was ahead of “Street” expectations (Table 2).
Further, third-quarter earnings “beats,” by sector, are also looking rather strong to date:
We anticipate modestly stronger domestic gross domestic product (GDP) growth and 6-7 percent earnings-per-share growth for the S&P 500 Index in 2017, and we believe that the general market has the potential to respond more favorably to economic data in coming quarters. We continue to carefully watch data on initial unemployment claims, a breadth of producer price index (PPI) numbers (inflation), consumer confidence, leading housing-market indicators, and consumer-spending data. We still believe that some U.S. economic segments that eventually benefit from tighter capacity utilization and increases in corporate capital spending (later in a cycle) should have an opportunity for more growth before this cycle has ended. Two of these sectors include the Industrial and Information Technology sectors of the economy.
Weekly Wrap and Look Ahead
Most major domestic and international indices were positive for the week; all have gained year to date.
|Index||Last Week’s Performance1||2016 YTD Performance|
|MSCI Emerging Markets||+1.6%||+17.4%|
Source: Wells Fargo Investment Institute, Bloomberg, 10/21/16
Seven of 11 S&P 500 Index sectors outperformed the Index, while eight of 11 gained ground on the week.
|Sector||Last Week’s Performance2|
|Sector||Last Week’s Performance2|
Source: Wells Fargo Investment Institute, Bloomberg, 10/21/16
Past performance is no guarantee of future results.
With only two weeks to go until the November 8 election, the stock market appears to be operating on low volume and trading on the day’s news. It appears likely that most investors with a longer-term view have adjusted positions well in advance and are set to ride through the vote. We would not expect much maneuvering in coming market sessions based on the election, but there could be some reaction to corporate earnings releases for individual companies on a short-term basis. We would argue that investors are quite comfortable with overall earnings coming in flat to an increase of potentially 1 percent—as this would be a slight improvement vs. the second quarter and better than the consensus had expected.
Looking ahead, for the fourth quarter, we expect earnings comparisons to once again improve vs consensus expectations. This is a pattern that has held, so far, in the previous three quarters of the year. Interest in earnings results has climbed somewhat in this reporting season, but we still believe that the market has been looking mostly at 2017 for quite some time (at least nine months). We anticipated that earnings in 2016 would show virtually zero growth vs. 2015 and possibly might even show a small decline. We believe that this is already baked into current stock prices. The stock market is looking for earnings improvement next year, and we believe that will be the case. We advise investors to remain invested, and we look for new record highs in the S&P 500 Index in the coming months.
|Sector||S&P Weighting*||Wells Fargo Investment Institute Guidance|
|S&P 500 Earnings Estimate for 2016||$119.00|
|S&P 500 Earnings Estimate for 2017||$127.00|
|S&P 500 Year-end 2016 Target Range||2,190-2,290|
Source: Wells Fargo Investment Institute, Bloomberg, 10/21/16.
|Percentage Change Y-o-Y|
|S&P 500 Index||-0.7|
Source: Wells Fargo Investment Institute, Bloomberg, 10/24/16. Developed Markets: MSCI EAFE Developed Market Index (Europe, Australasia, Far East). Emerging Markets: MSCI Emerging Markets Index.
All investing involves risks including the possible loss of principal. Equity securities are subject to market risk which means their value may fluctuate in response to general economic and market conditions and the perception of individual issuers. Investments in equity securities are generally more volatile than other types of securities.
Investing in foreign securities presents certain risks not associated with domestic investments, such as currency fluctuation, political and economic instability, and different accounting standards. This may result in greater share price volatility. These risks are heightened in emerging markets.
Technology and Internet-related stocks, especially of smaller, less-seasoned companies, tend to be more volatile than the overall market.
Targets and forecasts are not guaranteed and are subject to change.
An index is unmanaged and not available for direct investment
DJIA is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the Nasdaq.
Developed Markets: MSCI EAFE Developed Market Index (Europe, Australasia, Far East) is a free float-adjusted market capitalization index that is designed to measure developed market equity performance, excluding the U.S. and Canada. It is unmanaged and unavailable for investment. Statistics are shown in U.S. dollars and local currency.
Emerging Markets: The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets. The MSCI Emerging Markets Index consists of the following 23 emerging market country indexes: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Peru, Philippines, Poland, Qatar, Russia, South Africa, Taiwan, Thailand, Turkey and United Arab Emirates.
MSCI EAFE Index (Europe, Australasia, Far East) is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. and Canada. The Index consists of the following 21 developed market country indexes: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, and the United Kingdom.
MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets. The MSCI Emerging Markets Index consists of the following 23 emerging market country indexes: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Peru, Philippines, Poland, Qatar, Russia, South Africa, Taiwan, Thailand, Turkey and United Arab Emirates.
NASDAQ is an unmanaged group of the 100 biggest companies listed on the NASDAQ Composite Index. The list is updated quarterly and companies on this Index are typically representative of technology-related industries, such as computer hardware and software products, telecommunications, biotechnology and retail/wholesale trade.
The Producer Price index (PPI) is a family of indexes that measures the average change in selling prices received by domestic producers of goods and services over time.
Russell 2000 Index measures the performance of the 2,000 smallest companies in the Russell 3000® Index, which represents approximately eight percent of the total market capitalization of the Russell 3000 Index.
Russell Midcap® Index measures the performance of the 800 smallest companies in the Russell 1000 Index, which represent approximately 25 percent of the total market capitalization of the Russell 1000® Index.
S&P 500 Index is a market capitalization-weighted index composed of 500 widely held common stocks that is generally considered representative of the U.S. stock market. The Index is unmanaged and not available for direct investment.
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