Earnings Drive the Markets

Earnings Drive the Markets

  • Early Earnings Are Upbeat
  • The Benefits of Rising Dividends
  • Looking Ahead

Last weekend’s air strike in Syria left investors bracing for a bumpy week in the markets. Instead, stock market volatility was tamped down by generally upbeat first-quarter earnings reports.

As you well know, our steadfast focus on investment fundamentals rather than sensationalist headlines continues to serve us well. And as earnings season kicks into high gear next week, the bottom line is that bottom lines are doing very nicely and our economy continues to chug along.

For the year through Thursday, the Dow Jones Industrial Average has returned 0.4%, while the broader S&P 500 has gained 1.3%. The MSCI EAFE index, a measure of developed international stock markets, is up 1.6%. As of Thursday, the yield on the Bloomberg Barclays U.S. Aggregate Bond index has climbed to 3.26% from 2.71% at 2017’s end. On a total return basis, the U.S. bond market has declined 2.1% for the year.

Early Earnings Are Upbeat

Earnings season is only in its opening stanza, but the verse is a familiar one. Companies catering to U.S. consumers are faring fine due to full employment, rising wages, optimism and a shot in the income statement from the new tax law.

Businesses selling to other companies have yet to do as well as consumer-focused firms in this long-running bull market. But they are still in good shape due to the expanding global economy and the near-term tax benefit boost.

While lofty expectations are prone to even the slightest disappointment, on days when fear takes a back seat, fundamentals should continue to propel markets upward. As importantly, on days, weeks and even months when fear has the upper hand, our investment discipline and the tactical strategies you (and we) invest in will work tirelessly on your behalf.

The Benefits of Rising Dividends

You know our maxim: Earnings drive markets. Here’s another: Rising dividends matter. Put more plainly, you’re getting more value out of a stock when its dividend goes up. In fact, dividends have a major impact on the returns investors receive. For instance, over the past 25 years, the Dow Jones Industrial Average has risen 602% on a price-only basis through March. When you factor in reinvested dividends, its total return over that period is 1,157%—nearly double the amount! Based on numbers like that, you can see why we think dividends are such a big deal.

In 2018, dividend growth looks to be widespread both here and abroad. J.P. Morgan analysts expect 71% of all listed companies in the U.S. and 83% in Europe to raise dividends this year. They estimate that as many as 20 European companies will hike their dividends at least 50% during that time. Based on stock analyst estimates, S&P 500 companies will increase dividends by 8% in 2018 (the best rate in two years). Six percent growth is expected from Euro Stoxx 50 companies (similar to the Dow Jones Industrial Average for Europe), which would be the fastest rate in three years.

Our team at Braver Capital is interested in dividends for more than valuation purposes. They also tend to defend against market downdrafts. That’s especially true for the large, stable companies—those with “battleship balance sheets,” as we say around here—that tend to raise dividends regularly. Companies with a history of raising dividends have historically been less volatile, as investors know that their income is still growing. We’ve seen exactly that during the turbulent first months of this year. We think the stability that dividends provide during market pullbacks as well as their growing income stream deliver great value for investors, retirees in particular. Growing dividends are like getting a raise every year.

If the estimated first-quarter earnings growth rate of 17.1% for the S&P 500 comes to pass, this would make it the best quarter since the first quarter of 2011. Add the fact that dividends—the portion of profits dividend-paying companies reward shareholders with—are headed higher, and worries about the already high price of U.S. stocks should dissipate.

Meanwhile, stock buybacks (companies repurchasing their own shares, shrinking the available supply) are expected to increase significantly. How significantly? J.P. Morgan expects a 51% increase from $530 billion last year to $800 billion in 2018. As stocks become scarcer, they become more valuable and their prices look more reasonable. Buybacks help put a floor under prices.

Add it all up and the combination of rising earnings, rising dividends and rising buybacks makes the market look a bit more reasonably priced than some pundits might suggest.

Looking Ahead

Next week, we’ll get several economic reports of note, including regional and national gauges of manufacturing and service sector activity, new and existing home sales, home prices and consumer sentiment, and the first estimate of first-quarter economic growth.

We’ll also get first-quarter earnings reports from more than 700 companies, including, on Monday and Tuesday alone:

  • Halliburton (gauge of oil demand)
  • Whirlpool (consumer spending on big-ticket items)
  • Amgen (a health care/growth gauge)
  • Biogen (another health care/growth gauge)
  • Capital One (consumer lending, spending and indebtedness)
  • Caterpillar (barometer of global infrastructure spending as meter of economic health)
  • Coca-Cola (consumer spending)
  • Harley-Davidson and Polaris (“blue-collar bling”—spending on the luxury of owning an on- or off-road vehicle)
  • JetBlue (consumer and business traveling as gauge of spending and optimism)

If you'd like to learn more about our tactical or fundamental strategies, please contact Steve Johnson at 844-587-7393 or info@bravercapital.com.

Please note: This update was prepared on Friday, April 20, 2018, prior to the market’s close.

This material is distributed for informational purposes only. The investment ideas and expressions of opinion may contain certain forward-looking statements and should not be viewed as recommendations or personal investment advice, or considered an offer to buy or sell specific securities. Data and statistics contained in this report are obtained from what we believe to be reliable sources; however, their accuracy, completeness or reliability cannot be guaranteed.

Our statements and opinions are subject to change without notice and should be considered only as part of a diversified portfolio. You may request a free copy of the firm’s Form ADV Part 2, which describes, among other items, risk factors, strategies, affiliations, services offered and fees charged.

Past performance is not an indication of future returns. The tax information contained herein is general in nature, is provided for informational purposes only, and should not be construed as legal or tax advice. We do not provide legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation.

Companies mentioned in this article are not necessarily held in client portfolios and our references to them should not be seen as a recommendation to buy, sell or hold any of them.

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