What's On Tap...

Earnings and Flows

As we stated in our quarterly letter last week there are three major themes in the market: the US election, the Federal Reserve and corporate earnings.  This week we are in the middle of earnings season and so far companies have exceeded expectations on both earnings and revenues.  At the start of the quarter, the S&P 500 earnings expectations were $115 per share but the most recent announcements raised expectations to $119 a share.  This could stem the shallow earnings recession we witnessed over the last five quarters. It may also be the catalyst to move the market higher after the election and the Fed meeting. 

The earnings recession was caused by the large drop in oil prices starting in early 2015.  Stripping energy out as the chart below shows, earnings grew, albeit at a tepid pace.  This drag from the energy sector should reverse starting next quarter as oil prices have stabilized and earnings are expected to accelerate.

The first week of earnings season was dominated by financials reporting, a sector we are overweight in our Dividend Income portfolio.  The major banks led with strong earnings and revenue due to growth in both loans and deposits.  Banks have navigated the tough interest rate environment well and with rates likely headed higher in the coming quarters, we continue to view the risk/return profile favorably. Banks continue to return capital to shareholders by increasing their dividends.

Two other sectors we are overweight in our Dividend Income portfolio, Industrials and Technology, report this week and so far results have exceeded expectations as companies continue to execute despite the slow growth environment.  Retail investors seem to doubt the earnings as evidenced by the equity fund outflows over the last six months. This trend has been in place since the beginning of 2015.

These retail investor outflows have not kept the market from within reach of new all-time highs.  We are well aware of the uncertainty and volatility potential in the coming months, but we continue to find value in many sectors of the market.  

Christopher Deeley, CFA, Portfolio Manager

Christopher Deeley, CFA, Portfolio Manager


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