Big Picture · Strong U.S. earnings
It was an event-filled week with U.S. corporate earnings set to test the equity bull market which has propelled stocks higher for the past eight years. After a record Q1 in which earnings per share growth hit a multi-year high, market watchers should expect a slowdown but they should also expect a healthy rate of expansion. With nearly 50% of S&P 500 companies reporting thus far the index is on pace to report a yoy expansion of 9.0% according to FactSet. That’s below the 13.8% rate in Q1 but more than sufficient to maintain the positive earnings surprise trend. Turning to economic news, U.S. consumer conference bounced back after slipping the previous three months. The conference board on Tuesday said its index rose to 121.1 in July from a revised 117.3. In March, the index hit 124.9, the highest level since December 2000.
In central bank news, the U.S. Federal Reserve made no policy changes Wednesday but did say it would start unwinding its balance sheet “relatively soon”. In commodities news, Saudi Arabia, the world’s top oil exporter, said Monday it would further cut production and threatened to take action on others that aren’t keeping their promise to cut output. In political news, there was concern about policy direction from the White House following the failure to dismantle the Affordable Care Act and investigations into contacts with Russians before the November election. Turning to Europe, a Purchasing Managers Composite Index came in at 55.8 for July, lower than anticipated suggesting the economy grew slightly more slowly than analysts had expected. Also in Europe, U.K. GDP for Q2 came in at a lacklustre rate of 0.3%, a modest improvement from Q1 which posted a 0.2% growth rate. Looking ahead, we’ll see Q2 GDP figures today for both Canada and the U.S.
Tech stocks slip
Most major North American stock benchmarks ended in positive territory to close out the last week of July. For the four days covered in this report, the Dow rose 216 pts. to close at 21,796, the S&P 500 added 3 pts. to finish at 2,475 and the Nasdaq gave back 5 pts. to settle at 6,382. The TSX was up 8 pts. through Thursday to end the session at 15,191.
Maintaining overweight equities
Equities: Strong U.S. Q2 results (73.6% beat their respective earnings estimates with an average 6.4% surprise) and a rise in global bond yields (U.S. 10 year Treasury now at 2.3% and pointing higher) creates an ideal backdrop for a continued rise in the global equity bull market. We continue to hold our overweight view (from Q1’16) and believe a rotation into cyclically-oriented sectors offers the best opportunities at the expense of defensives. Sector-wise, we retain a preference for banks, insurance, brokers, energy, chemicals, metals, paper, communications equipment, select retail, autos, industrials, and health care. Geographically, we went overweight Europe in Q1 and believe the time has come to include Canada within that overweight discussion in view of improving commodity pricing.
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.
This publication has been prepared by ScotiaMcLeod, a division of Scotia Capital Inc. (SCI). This publication is intended as a general source of information and should not be considered as personal investment or tax advice. We are not tax advisors and we recommend that individuals consult with their professional tax advisor before taking any action based upon the information found in this publication. Opinions, estimates, and projections contained herein are our own as of the date hereof and are subject to change without notice. The information and opinions contained herein have been compiled or arrived at from sources believed reliable but no representation or warranty, express or implied, is made as to their accuracy or completeness. Neither SCI nor its affiliates accepts liability whatsoever for any loss arising from any use of this publication or its contents. This publication is not, and is not to be construed as, an offer to sell or solicitation of an offer to buy any securities and/or commodity futures contracts. SCI, its affiliates and/or their respective officers, directors, or employees may from time to time acquire, hold, or sell securities and/or commodities and/or commodity futures contracts mentioned herein as principal or agent. SCI and/or its affiliates may have acted as financial advisor and/or underwriter for certain of the corporations mentioned herein and may have received and may receive remuneration for same. All insurance products are sold through Scotia Wealth Insurance Services Inc., the insurance subsidiary of Scotia Capital Inc., a member of the Scotiabank Group. When discussing life insurance products, ScotiaMcLeod advisors are acting as Insurance Advisors (Financial Security Advisors in Quebec) representing Scotia Wealth Insurance Services Inc. This publication and all the information, opinions, and conclusions contained in it are protected by copyright. This report may not be reproduced in whole or in part, or referred to in any manner whatsoever, nor may the information, opinions, and conclusions contained in it be referred to without in each case the prior express consent of SCI.