Weekly Market Updates

Burt White Chief Investment Officer, LPL Financial | Jeffrey Buchbinder, CFA Market Strategist, LPL Financial

Is it time for the tax reform pivot? Earnings season will get a lot of attention this week (July 24–28) with 190 S&P 500 Index companies slated to report, as will the Federal Reserve with its two-day policy meeting concluding on Wednesday, July 26 (though we do not expect any big news). Just as important for markets is the Republicans’ latest unsuccessful attempt to reform healthcare, which means that we are closer to the pivot toward tax reform.

This week, given the latest healthcare developments in Washington, D.C., we share our updated thoughts on tax reform’s prospects and some implications for the healthcare sector.

Burt White Chief Investment Officer, LPL Financial | Matthew E. Peterson Chief Wealth Strategist, LPL Financial

Can overseas earnings continue to grow and extend the first-half rally in many international markets? That is the question investors are asking as second quarter 2017 earnings season begins. Since the financial crisis of 2008, U.S. companies and equity markets have generally outperformed their overseas peers. Greater U.S. profitability and corporate efficiency have resulted in stronger earnings growth, and domestic equity markets outperforming overseas ones. That may be starting to change, as earnings growth is improving overseas and international markets are outperforming domestic market indexes.

Now that Europe is past the potentially upsetting elections in the Netherlands and France with little volatility, the market will be focusing on earnings. European corporate earnings had been weak until the fourth quarter of 2016, which continued the trend of strong fourth quarters, even in weak years [Figure 1]Despite a strong finish in 2016, for the year European corporate earnings had declined -5.4% in U.S. dollar terms. Unlike in other years, earnings started strong in 2017, with annual earnings growth of 15% through the rst quarter of 2017. Expectations were high, and 62% of companies outperformed expectations, far better than recent performance. The single largest contributor to growth came from energy companies, which bene ted from the rebound in oil prices over the past year. Other sectors also showed strength, with earnings improvements in basic materials, consumer companies, as well as financials.

Burt White Chief Investment Officer, LPL Financial | Jeffrey Buchbinder, CFA Market Strategist, LPL Financial

Earnings season is underway this week (July 10–14) and may be another good one, with double-digit S&P 500 Index earnings growth possible. But getting to double digits will be tougher than it was in the first quarter when S&P 500 earnings increased more than 15% year over year.

First quarter earnings season will be a tough act to follow as the year-over-year comparison gets more challenging. The first quarter of 2016 was the trough of the earnings recession, so the first quarter of 2017 had the easiest annual comparison. Growth improved (fell less) in the second quarter of 2016 as corporate America began to emerge from the earnings recession, lifting the base for comparison for the just-completed second quarter. This trend will continue over the rest of 2017 given the earnings growth acceleration achieved during the third and fourth quarters of 2016 [Figure 1].

A TECHNICAL CHECK-IN
THE GLOBAL BULL LOOKS STRONG

Burt White Chief Investment Officer, LPL Financial | Ryan Detrick, CMT Senior Market Strategist, LPL Financial | Dave Tonaszuck, CMT Technical Strategist, LPL Financial

The global equity bull market is alive and well, with very broad participation. Longer-term technicals continue to look very healthy and strong, even as the bull market and economic recovery in the U.S. turns eight years old. A closer look at key indexes suggests the path of least resistance remains higher for stocks, although it likely won’t be an easy ride, as volatility could creep higher during the second half of 2017.

MIDYEAR OUTLOOK 2017 BUSINESS FUNDAMENTALS BACK AT THE CONTROLS

Burt White Chief Investment Officer, LPL Financial | Jeffrey Buchbinder, CFA Market Strategist, LPL Financial

We forecast 6–9% returns for the S&P 500 Index in 2017. As investors increasingly trust that the economy can stand on its own without the need of monetary policy support, business fundamentals should take over as the primary market engine and corporate profits will take on increasing importance. We have slightly raised our 2017 S&P 500 Index total return forecast to 6–9%, commensurate with expected earnings gains.

HURDLING OVERSEAS EARNINGS WHAT DO THE FORECASTS TELL US?

Burt White Chief Investment Officer, LPL Financial | Matthew E. Peterson Chief Wealth Strategist, LPL Financial

Overseas earnings were even better than expected during the first quarter (Q1) of 2017. Global equity analysts were looking for strong earnings growth from overseas companies after years of flat to declining earnings; for the most part, those markets delivered. Stock markets themselves responded, with international markets generally outperforming the S&P 500 Index. Frequently after earnings are released, analysts may reduce future growth expectations, often based on conservative comments from companies as they manage expectations. However, earnings expectations only decreased modestly during this period, and actually increased further for some regions. It is great to see continued optimism on corporate fundamentals, but it could prove challenging for companies to outpace expectations again.