INSIGHTS FROM FIRST FOUNDATION

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The Week Ahead – E for Earnings

Welcome to “The Week Ahead” where we take a moment to provide our thoughts on what we can expect in markets and the economy during the upcoming week.

This week will be the busiest week for earnings season with 37% of S&P 500 earnings reporting. So far, 127 companies, representing about 40% of index earnings, have reported with 77% beating earnings per share estimates, 73% beating sales estimates, and 61% beating both EPS and sales. All numbers are higher than average as expectations had been cut heavily due to the lack of transparency and the various scenarios that could have played out with COVID-19. Investors initially gave companies a free pass as markets rallied through May and June. With more transparency around earnings, investors will be able to formulate better what fair value is for many companies. Investors have punished those companies that have missed on both EPS and sales. In an investment environment where passive equity investing has gained over 60% market share, it’s healthy to see individual companies get rewarded and punished on their own merits. Earnings (specifically earnings growth) are a large component of long-term equity returns. Market consensus had priced in a terrible second quarter, and so far it seems the bar was set too low. Looking out to the third quarter, consensus has already priced in a fairly robust rebound, even with transparency still fairly opaque. As we’ve said many times before, markets typically overshoot on both the downside and upside.

After last week’s relatively modest flow of economic data, the week ahead will be jam packed with important data points reporting each day. As my colleague Brett Dulyea mentioned in last week’s update, retail sales have continued to surprise on the upside. We’ll get a look a better look at how some of the larger ticket items fared in June via Monday’s durable goods orders report. We’ll also see if June can build upon May’s +15.8% rebound (much needed!) after March’s -16.7% and April's -18.1%. The Fed will provide their July rate decision (expect no change for rates) and we’ll finally get our first look at the damage done by COVID-19 in the second quarter as we get the first estimate for U.S. GDP on Thursday.

Data deck for July 25–July 31

Date

Indicator

Period

July 27

Durable Goods Orders

June (Preliminary)

July 28

Consumer Confidence

July

July 28

Case-Shiller Home Price Index

May

July 29

Pending Home Sales

June

July 29

FOMC Rate Decision & Press Conference

----

July 29

Wholesale Inventories

June (Preliminary)

July 29

Advance Goods Trade Balance

June

July 30

Initial Jobless Claims

----

July 30

U.S. GDP 2nd Quarter

2Q2020

July 31

Chicago Purchasing Managers Index

July

July 31

University of Michigan Consumer Sentiment

July

July 31

Personal Spending

June

July 31

PCE

June

July 31

Employment Cost Index

2Q2020

 

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Andrew Chan, CAIA, Managing Director of Portfolio Strategy
About the Author
Andrew Chan, CAIA, Managing Director of Portfolio Strategy
Mr. Chan serves on the investment team and is responsible for conducting investment manager research and portfolio construction. As a member of the investment committee, he provides market commentary and investment insights. Mr. Chan’s responsibilities include overseeing client portfolios, calculating risk metrics, conducting the rebalancing of client portfolios, and evaluating the selection of new investment managers. With over 10 years of wealth management experience, Mr. Chan has played key roles across various aspects of investment and wealth management. Prior to joining First Foundation Advisors, Mr. Chan was most recently a portfolio manager at U.S. Trust where, in addition to his daily responsibilities, he served on numerous internal committees including the investment manager committee, the portfolio model committee, and the strategic technology committee. He also served on the in-house strategic consultant committee reporting directly to the President of U.S. Trust. Mr. Chan is a graduate of the Wharton School Executive Program on Investment Management and holds a Bachelor of Arts degree in Business Administration from the University of California, Riverside. He is a Chartered Alternative Investment Analyst (CAIA). Mr. Chan serves on the executive board for CAIA Los Angeles and is the Interim President for the association. Read more