Earnings Trends Remain Primary Market Driver

Market Updates

Earnings Trends Remain Primary Market Driver

Mike Gibbs, Managing Director of Equity Portfolio & Technical Strategy, discusses continued earnings growth and current market conditions.

July 25, 2017

Heading into 2Q earnings season, the S&P 500 was able to break out to new highs, as were the S&P Equal Weight Index, Dow Jones Industrial Average, Nasdaq Composite, Dow Transports, and Russell 2000. For now, the potential for delays in the new administration’s fiscal agenda (particularly in tax reform) has not acted as a headwind to the equity markets, due the strongest earnings growth in years.

Earnings trends continue to be the primary driver following 1Q’s 14% earnings growth to begin the year. According to Factset Research, 2Q S&P 500 earnings are estimated to grow by ~7% at the moment, although earnings growth has finished 2.9 percentage points higher on average over the past five years. Full year earnings estimate revisions have also been the most stable in several years, and remain at 10.2% growth. With S&P 500 valuation metrics near historical highs, earnings will likely be relied upon to continue the equity market’s momentum.

We are mindful of the potential for a normal pullback this year. In non-bear market years, the S&P 500 has still experienced a 9% intra-year drawdown on average. The largest pullback this year has been -2.8%, which would be the smallest since 1980 (close to the current lowest reading of -2.9% in 1995). We think the current economic, earnings, and technical backdrops, however, are supportive of equity markets moving forward. We would continue to view pullbacks within our favored sectors, as well as the overall market, as buyable opportunities.

On a technical basis, the S&P 500 breakout in late May generated a price target of 2473. With the recent breakout above June’s highs, the path of least resistance remains higher and we think the S&P 500 could push upper-2400 levels. Additionally, plenty of technical support levels are nearby in the event of a pullback. 2450 is the first area of support, followed by the 50 DMA (2422) and 2400. If the S&P 500 were to trade down to its 200 DMA of 2310, the normal pullback would amount to ~-6.4% below current levels.

Source: FactSet, Raymond James Equity Portfolio & Technical Strategy

The information contained does not purport to be a complete description of the securities, markets, or developments referred to in this material, is not a complete summary or statement of all available data necessary for making an investment decision, and does not constitute a recommendation. Past performance may not be indicative of future results.

Every investor's situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Investing involves risk and you may incur a profit or loss regardless of strategy selected. All opinions are as of posting date and are subject to change without notice.

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