Politics in the spotlight
Political news overshadowed economic releases this week as traders eyed the Trump tax plan, trade deals and Saudi Arabia’s crackdown on corruption. The world’s largest energy producer arrested a wide range of princes, businessmen and government officials starting last Sunday while freezing bank accounts to clamp down on graft. The actions – along with a rebalancing of global oil supply – helped send the price of crude at the start of the week to levels not seen since 2015. Turning to the Trump tax plan, it was being dissected by lawmakers through Thursday raising concern that Republicans may not be able to get the bill through to the White House. With regard to U.S. earnings, more than 85% of S&P 500 companies had reported results at the close of trade Wednesday with roughly three-quarters beating expectations according to FactSet. Per-share Q3 earnings at the firms have grown 6.4% led by the energy sector which is rebounding from a slump in 2016. Turning to the eurozone, the European Union released updated growth forecasts for the region upping GDP estimates to 2.2% for the year from 1.7% which would make it the fastest growing year in a decade. In related news, the European Commission’s chief Brexit negotiator resumed talks with his British counterpart Thursday with no indication an imminent breakthrough is in the cards. Also on the trade front, Canada did not sign the revised Trans-Pacific Partnership deal this week saying it wanted the right deal opposed to a fast deal. Looking ahead, the world’s largest economies – China, Japan, Great Britain and the U.S. – will be reporting market-moving data next week giving market watchers a look under the hood of the global economy.
U.S. stocks fall
U.S. stock benchmarks took a breather this week on the prospects of Trump’s tax overhaul being scuttled or delayed while the TSX inched higher thanks to gains in the energy sector. For the four days covered in this report, the Dow fell 78 pts. to end at 23,461, the S&P 500 shed 3 pts. to close at 2,584, the Nasdaq gave back 14 pts. to finish at 6,750 and the TSX rose 62 pts. to settle at 16,082.
Markets continue to impress following U.S. election
Equities: Despite near term USD strength, we remain bullish on equities and prefer overweights in Canada, Europe and Emerging Markets at the expense of the U.S. Our new Japan overweight, noted in the last edition of this publication, is off to a good start and we believe the Japanese market is beginning to outperform on improving global demand, tight domestic capacity and ample liquidity. In the short term, our Japan overweight recommendation should be buoyed by receding North Korean tensions, favourable local fund flows (selling foreign bonds in favour of domestic equities as yields rise), and improving Japanese economic data. In the U.S., earnings season is past its midpoint and Q3’17 blended earnings growth has slowed to 4.7% y/y. The lower growth rate is due to a $6.9B decline in insurance company earnings related to hurricane catastrophe damage. Excluding insurance from the index, the blended earnings growth rate for the S&P 500 would jump to 7.4%. The blended revenue growth rate for the S&P500 in Q3 currently stands at 5.7%. The twelve month bottom-up target price for the S&P 500 is 2771.94, which implies approximately 8% price return potential based on the recent closing level. Some price consolidation is possible in the mid-November timeframe but otherwise we believe global equity markets are poised to close the year higher. We are buyers of pullbacks but believe they will remain of single digit magnitude, potentially disappointing investors underweight equities.
This material does not include or constitute an investment recommendation, and is not intended to take into account the particular investment objectives, financial conditions, or needs of individual clients. Before acting on this material, you should consider whether it is suitable for your particular circumstances and talk to your investment advisor.
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