The Week Ahead – The Claw Machine

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

The claw machine at the arcade. Probably one of the most frustrating devices ever created by man, for man. Especially on date night. Many a dollar spent as your date inevitably changed their mind on which prize you should try and get them. A major key to success was to block out all the noise (of the arcade and your date) and to keep your eye on the prize. 

Trump. Russia. Lawyers. The FBI. Headline media. All short-term macro arcade noise distracting investors from the prize, long-term fundamentals of the stock market: company earnings.  This week officially kicked off second quarter earnings season with about 7% of S&P 500 earnings reporting. This coming week we will see almost 20% of S&P 500 earnings being reported. As noted in our Economic Insights piece a few weeks ago, domestic equity markets have been helped by superior earnings and sales growth over the past few years. First quarter earnings of this year were a perfect reflection of that, with earnings per share coming in 5% above analysts’ expectations while earnings growth of +15% year-over-year was the best in five years. No doubt, it was a great first quarter and one of the key reasons why investors have been able to shrug off disappointment from policymakers in Washington. Remember, the market had started the year with expectations of an infrastructure spending bill, tax cuts at both the individual and corporate levels, looser regulation, and health care reform. Clearly at this point expectations of the size, scope, and timeframe for these policy changes have been lowered by investors.

We probably won’t see another +15% year-over-year earnings growth for the second quarter and that’s ok. Current expectations are +8% year-over-year earnings growth. Similar to our view on the U.S. economy, great is good, but good is good enough. We could see some volatility as retail investors expecting an even better second quarter than first quarter are left disappointed. We continue to remain overweight in large cap domestic equities as we expect another couple years of solid earnings growth. 

Eye on the prize.

Data deck for July 15-July 21: