Both economic and corporate tailwinds pushed equity markets higher last week while muted inflation data edged interest rates slightly higher. The week carried a good amount of geopolitical news, most of which had already been priced into the markets based on the benign response. U.S. exiting the Iran deal, continued trade talks between Chinese and U.S. delegations, and the announcement of North Korea talks to be held in Singapore on June 12th were the political highlights for the week. Earnings season is drawing to a close with impressive results and oil prices moved higher on Middle East friction stemming from Iran.
- With over 90% of S&P 500 companies reporting, we’ve registered 24.9% earnings growth and 8.2% revenue growth. Wal Mart’s report this Thursday marks the “unofficial” end to Q1 earnings season. Technology, materials (44.1%), and energy (95%) are leading the way, helped meaningfully by their larger percentage of non-U.S. revenues.
- Strong earnings guidance has been notable this quarter. The guidance spread (# raising/# lowering guidance) of +4.9 is one of the strongest readings over the past 17 years.
- Strong earnings have taken the P/E ratio down to a respectable 17.2x from end January’s peak of 19.2x. Equity market volatility is also declining, down 16% last week, now over 35% lower than the end of the first quarter.
- Recent market technicals are looking stronger. The S&P 500 cumulative A/D line has made three new highs since the Jan/Feb correction and the Russell 2000 is back to within 1% of a new all-time high.
- The announcement of a U.S. exit from the Iran deal and resulting sanctions took oil prices up over 3% to over $70 for the first time since 2014. WTI crude is +15% YTD and +50% over the past 12 months.
- U.S. dollar (USD) strength is factoring into small cap relative outperformance over large caps given their smaller percentage of international exposure.
- The Euro has been a mirror image to the USD, breaking below $1.20 last week for the first time since early January.
- April’s weaker inflation data has reduced some anxiety surrounding Fed policy looking forward. Last week’s inflation data showed inflation accelerating but maybe not as fast as some feared.
- Argentina is seeking support from the IMF, again. EM currencies are in a particularly difficult stretch here, now down nearly 7% since their February highs.