THE POWER OF CORPORATE EARNINGS

Stocks stumbled across the globe last week as trade tensions continued to escalate. Despite rebounding somewhat on Friday, the S&P 500 experienced its first weekly loss in a month, and the Dow posted its worst week since March.^[1] The S&P 500 dropped 0.89%, the Dow lost 2.03%, and the NASDAQ fell 0.69%.^[2] International stocks in the MSCI EAFE gave back 0.98%.^[3]

While trade headlines may affect market performance, a closer look at the data shows other, more powerful drivers affecting equity prices. In particular, many investors continue to focus on corporate earnings estimates.^[4]

Analyzing Corporate Earnings
Strong corporate earnings have helped maintain a sense of market balance in 2018. As the media focuses on political stories, corporate earnings estimates continue to rise – and have a greater market affect than many investors may recognize.^[5]

How Corporate Earnings Estimates Work

Many financial services companies hire analysts to predict how much a company’s stock will earn per share. The average of all the experts’ predictions creates a consensus earnings estimate. This calculation gives a rough view of the company’s cash flow – which helps investors value a stock. Generally, when a company beats its earnings estimate, the stock price goes up. If it misses or matches the prediction, the stock may suffer.^[6]

Where We Are Now

Tax cuts and increasing demand have helped earnings estimates grow this year. As the estimates have risen, companies with the largest increases are significantly outperforming those with the worst. The latest numbers show earnings per share growing in 2019 and 2020 – and 2018’s projections are higher than they were at the end of the 1st quarter. This data has helped keep markets from overreacting to the geopolitical buzz in the background.^[7]

Looking Forward
While we expect to hear more on a potential trade war, we will continue to focus on key market principals. This week, we will receive several reports, including consumer confidence and durable goods orders. Rather than significantly affecting stocks, these releases may simply underscore what corporate earnings and other data continue to demonstrate: Right now, the economy is healthy.^[8]

Next month, earnings season will begin, and analysts expect S&P 500 companies to show 20% profit growth in the 2nd quarter.^[9]

Looking ahead, we will continue to analyze how rising tariffs could affect the domestic and global markets. But, as always, economic fundamentals will take the lion’s share of our attention.

If you have questions about earnings, trade, or your future, contact us any time.

ECONOMIC CALENDAR:
Tuesday: Consumer Confidence
Wednesday: Durable Goods Orders
Thursday: GDP,Jobless Claims
Friday: Personal Income and Outlays, Consumer Sentiment

_{Notes: All index returns (except S&P 500) exclude reinvested dividends, and the 5-year and 10-year returns are annualized. The total returns for the S&P 500 assume reinvestment of dividends on the last day of the month. This may account for differences between the index returns published on Morningstar.com and the index returns published elsewhere. International performance is represented by the MSCI EAFE Index. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly.}

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Diversification does not guarantee profit nor is it guaranteed to protect assets.

International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors.

The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.

The Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the NASDAQ. The DJIA was invented by Charles Dow back in 1896.

The Nasdaq Composite is an index of the common stocks and similar securities listed on the NASDAQ stock market and is considered a broad indicator of the performance of stocks of technology companies and growth companies.

The MSCI EAFE Index was created by Morgan Stanley Capital International (MSCI) that serves as a benchmark of the performance in major international equity markets as represented by 21 major MSCI indexes from Europe, Australia and Southeast Asia.

The Dow Jones Corporate Bond Index is a 96-bond index designed to represent the market performance, on a total-return basis, of investment-grade bonds issued by leading U.S. companies. Bonds are equally weighted by maturity cell, industry sector, and the overall index.

The S&P US Investment Grade Corporate Bond Index contains US- and foreign issued investment grade corporate bonds denominated in US dollars. The SPUSCIG launched on April 9, 2013. All information for an index prior to its launch date is back teased, based on the methodology that was in effect on the launch date. Back-tested performance, which is hypothetical and not actual performance, is subject to inherent limitations because it reflects application of an Index methodology and selection of index constituents in hindsight. No theoretical approach can take into account all of the factors in the markets in general and the impact of decisions that might have been made during the actual operation of an index. Actual returns may differ from, and be lower than, back tested returns.

The S&P/Case-Shiller Home Price Indices are the leading measures of U.S. residential real estate prices, tracking changes in the value of residential real estate. The index is made up of measures of real estate prices in 20 cities and weighted to produce the index.

The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.

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