US Earnings Optimism

Global equities remained buoyant last week as there were no new negative shocks from North Korea and even Catalonia backed away from immediately declaring independence from Spain. The upgrade to the global economic outlook from the IMF added to the positive mood, though a spat between US President Trump and a senior Republican Senator (Bob Corker) had Washington and Wall Street again fretting over the chances of a market-boosting tax package getting through Congress anytime soon.

The bottom line was that while Wall Street stocks touched new record highs last week, bond yields and the US dollar retreated a little. In turn this provided a boost to commodities, especially gold. Globally, notwithstanding distortions caused by America’s recent hurricanes, economic data remains generally positive - which is a nice backdrop given focus is likely to turn to America’s September quarter earnings results over the next few weeks. Thanks to flatter oil prices, and some negative hurricane effects, annual earnings growth for companies in the S&P 500 Index is unlikely to match the double digit pace of the first two quarters of 2017 – but a result closer to 5-6% still seems possible, which should be enough to keep investors in a positive mood.

According to FactSet, of the 6% of S&P 500 companies that have reported so far, 80% beat earnings estimates – comfortably above the long-run average of 70%. Another 200 of these companies are scheduled to report earnings over the next fortnight. There’s a smattering of other US economic data this week, though nothing that seems likely to risk the current strong market conviction that the Fed will raise rates again in December.

China will also be a focus of attention this week, with its current key leaders re-appointed at the Party Congress meeting on Wednesday, and its monthly “data” dump covering retail sales and industrial production on the same day. A key focus with regard to China in coming months is the extent to which the freshly appointed leadership team switches focus back toward dealing its economic imbalances (i.e. over reliance on debt and heavy industry) even at the expense of a short-run hit to economic growth. Any move in this direction would be a clear negative for (already weakening) iron ore prices and the Australian dollar.

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There was a much more positive mood in the local market last week, with the S&P/ASX 200 surging by 1.8% to the top end of its recent very tight range. A surprise bounce in consumer confidence (likely thanks to the strong labour market) boosted consumer focused stocks, while it was also heartening to see the National Australia Bank index of business conditions hold at a high level.

Housing indicators were mixed, with further signs of a softening in Sydney property prices, though lending to investors remained firm and that to owner occupiers strengthened further. Sadly, a late-cycle State government boost to incentives may be luring more fist home buyers into the Sydney and Melbourne market (right at their peak!), while investors may now to seeking out better value in other markets.

As a further sign of its focus on financial stability risks, the Reserve Bank also announced it would begin conducting its own set of banking stress tests, given that those conducted by APRA tend to rely on each bank’s own estimates of likely losses under certain scenarios.

Data wise, the key highlight this week will be the September labour market report which is likely to show jobs demand remains firm, thanks to health, education, housing and infrastructure.

Have a great week!

Written By: David Bassanese