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Earnings Matter (Especially Now): July 2017 Market Commentary


  • July saw another month of ex-U.S. outperformance in both equities and fixed income largely led by U.S. dollar weakness (Dollar Spot DXY down 2.9% for the month and -9.35% YTD).
  • Commodities also benefited from the U.S. dollar weakness led by energy prices as oil continues to recover off its 2Q lows.
  • According to the 7/28/2017 FactSet Earnings Insight report, with 57% of the companies in the S&P 500 having reported 2Q17 results, S&P earnings have grown 9.1% on a blended basis.
  • The S&P 500 was narrowly led by strong performance from telecom and technology. The rest of the market struggled to keep up with the broad market advance.
  • Based on a comparison of tax-equivalent municipal bond yields versus U.S. Treasuries, muni investors may be pricing in a version of tax policy that could be especially punitive to the mid- to upper income segments.

Data Source: Bloomberg

Earnings Matter (Especially Now)

Source: istockphoto.com

According to the 7/28/2017 FactSet Earnings Insight report, with 57% of the companies in the S&P 500 having reported 2Q17 results, S&P earnings have grown 9.1% on a blended basis. Earnings growth in the U.S. has recovered quite nicely despite the ongoing earnings pressures energy companies are experiencing due to oil price volatility from the second quarter. If energy prices do not recover from their 2Q low levels, then energy earnings decline could accelerate barring any major offsetting cost-cutting measures. On the more positive side, S&P companies are enjoying strong revenue growth which has become a major contributor to overall earnings growth (especially in financials and technology) as opposed to margin improvement (i.e., cost cutting). For all of 2017, S&P earnings are expected to grow 9.5% on top of revenue growth of 5.5%. In addition, fewer companies are issuing negative EPS guidance for 3Q versus the 5-year average.

A peek into market earnings at the macro level can be a useful exercise because earnings ultimately anchor market returns. Your typical fundamental stock picker will tend to focus more on company-level earnings releases but will likely not focus on earnings in isolation without a broad appreciation for how the earnings picture is shaping up for the broader markets. There are moments where markets advance ahead of earnings growth and vice versa, but the two are ultimately tied at the hip.

Exhibit 1 tracks the S&P 500 price index versus basic earnings per share (orange dashed lines) along with the trailing price/earnings multiple. With earnings having largely caught up with the price advance, further market advances will likely rely on earnings going forward given the elevated valuations.

Exhibit 1 – Pay It Forward: Further Market Advances Will Need to Be Driven By Earnings

This article was written by

Benjamin M. Lavine, Co-Chief Investment Officer at 3D/L Capital Management, is an investment professional with 20 years of experience in asset management and institutional consulting. Ben brings a versatile investment background and knowledge set having served as a portfolio manager on the developed markets equity team at Batterymarch Financial Management and as a vice president in the Funds Management Division at Wilshire Associates. Ben brings expertise in the following areas: Global Quantitative Equity Research and Management, Macro Investment Strategy, Institutional Product Management and Development, and Institutional Consulting and Public Markets Fund-of-Funds Ben received his MBA from UCLA’s Anderson School of Management, holds the CFA designation, and has experience working on data platforms including Bloomberg, Factset, MATLAB, Orion Technologies, and Thomson/Reuters.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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