July ended a news-rich month with favorable returns for global equities and the higher risk sectors of the fixed income market. Support came from strong second-quarter earnings reports and a jump in GDP to its best level in four years. Tariffs remained a focus but the tone was light and improved with a new agreement with Europe and no escalation with China. Late in the month, the news cycle flipped to earning misses from highly owned Facebook, Twitter, and Netflix.
The table below shows returns for segments of the financial markets. Returns look surprisingly favorable considering the name-specific events in the markets. Large Cap US stocks managed to beat International equities on better growth in the US economy. High yield and corporate debt also benefited from favorable corporate earnings reports.
Earnings Beat Goes On
Second quarter earnings are up as of July 27th by 23% year-over-year keeping pace with the trend from the first quarter where they were up 27%. Companies are on pace to “beat” (percentage of S&P 500 companies beating consensus estimates) at a record rate of 83%. While growth is great, we are beginning to question the long-term sustainability of such strong results.
Of course, we have to mention the Facebook face plant from a stumble in second-quarter earnings that led to a 19% one-day decline in market value. Facebook has some work to do regarding customer confidence. Probably more important is the question: can the technology sector as a whole manage high investor expectations?.
Real (inflation-adjusted) GDP jumped to a 4.1% annual rate in the second quarter, which was below the consensus estimate of 4.4%, but still the highest pace of growth in nearly four years. The increase was led by personal consumption and business capital spending.
The trend of rising trade tensions and the anticipated end to accommodative monetary policy are making us a bit more cautious. We anticipate economic fundamentals and corporate earnings to remain healthy and sustainable but to begin to come in at a slower rate. Be prepared for bouts of volatility, and remain patient, diversified and disciplined.
John Kirby is a Principal and Co-Founder of Laurentide Advisory