U.S. corporate earnings in focus
It was an event-filled week with a number of market-moving developments starting with the kick-off of U.S. Q3 corporate earnings season. It got underway with expectations of solid results as analysts anticipate S&P 500 companies to post earnings growth of about 4.2% in Q3; slightly lower than previous quarters due to recent hurricanes. American firms relying on global revenues for earnings are expected to fare even better thanks to a strengthening global economy. In light of improving global economic data, the IMF upped its growth forecast for the world to 3.6% this year and 3.7% in 2018, an acceleration from the 3.2% recorded in 2016. Among the world’s 10 largest economies, the U.K. is the only one predicted to see slower economic growth over the next two years according to the Washington-based fund. Also of note, minutes released Wednesday covering the U.S. Federal Reserve’s latest meeting in September showed officials on track to raise interest rates despite being split on the direction of inflation in the coming months. The Fed has two more meetings this year – at the end of October and the middle of December – at which they could possibly raise rates. Turning to the ECB, bank head Mario Draghi said the bank is considering a reduction in its monthly bond purchase program but is divided on an end date for the purchases. With regard to NAFTA talks, the fourth round of negotiations got underway in Arlington, Virginia Wednesday with discussions pre-empted by Prime Minister Trudeau’s visit with President Trump who said he’s okay with the agreement ending. Elsewhere, OPEC said consultations were underway to extend oil production cuts beyond March 2018 with a potential deal possible when officials meet in Vienna November 30. Looking ahead, market watchers will get a look at U.S. retail sales and consumer price inflation today with the Fed paying particular attention to the latter.
U.S. stocks reach new heights
Major U.S. stock benchmarks rose to fresh highs mid-week but could not hold the gains through Thursday close. For the four days covered in this report, the Dow rose 268 pts. to close at 22,841, the S&P 500 added 1 pt. to settle at 2,550 and the Nasdaq also moved ahead 1 pt. to end at 6,591. In Canada, the TSX hit a seven-month-high Wednesday ending the period up 14 pts. to finish at 15,742.
Markets continue to impress following U.S. election
Equities: Within equities, we advised going overweight Canada by underweighting the U.S. at the start of Q3’17 (on the basis of a strengthening C$ and oil recovery) and so far it has been the correct call. Going further back, at the end of Q1’17 we initiated an overweight position in Europe and Emerging Markets (also by underweighting the U.S. – on the basis of a steeper yield curve, positive economic upgrades, and receding political risks). We remain committed to this call as well given strong outperformance.
Our overall asset class call to overweight equities as opposed to fixed income or cash originated in late Q1’16 which again has gone in our favour. Despite the possibility of a small near-term pullback, we believe equities still offer better relative valuations and remain under-owned. Any potential pullback or spike in volatility would be a buying opportunity in our view. In other words, we believe investors could replace their proverbial fear of an imminent “meltdown” with images of a slow and steady “melt-up” within equities as the risks surrounding the timing of the end of the cycle remain skewed to beyond 2019 rather than sooner. Traditional end-of-cycle indicators remain encouraging in our view.
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