May 2019 Market Update

The S&P 500’s gain through the first four months of this year ranks as the index’s strongest start to a year since 1975. In the past 70 years, there have only been 16 years in which the S&P 500 index rose by double digits in the first four months. In 14 of those years, the market finished the year higher with the rest-of-the year gains ranging from 2% to 21%.

There are a myriad of factors influencing market movements right now including a more accommodative Federal Reserve, upbeat economic prospects (including strong wage growth pictured below), trade issues with China, and Brexit uncertainties. But no factor contributes more to the long-term direction of domestic stock prices than U.S. corporate earnings.

The key in terms of the market’s movement relative to economic and earnings data is not necessarily whether the outlook is positive or negative, but rather, whether the earnings expectations already being priced into the market are met or exceeded. As we began the new year, the consensus forecast was that first quarter earnings would decline 5-6% despite increased revenue as margins would be squeezed by higher wages, a strong dollar and higher oil

prices. However, earnings reports have mostly exceeded expectations, with 76% of companies having reported results beating analysts’ forecasts, according to FactSet.

With over 70% of the S&P 1500 companies having reported, earnings are running 5.7% above expectations with positive overall surprises in every sector except energy. Rather than contracting, earnings are running approximately 2% higher than last year’s first quarter.

Expectations for the second quarter and the following quarters will evolve as more companies report first quarter results and provide commentary about their business conditions. The most frequently cited concerns on earnings calls thus far have been wage costs, material costs and tariffs. The strong U.S. dollar is also expected to have a significant negative currency impact on North American companies. We will be keeping a close eye on this revisions trend.

The near-term fundamental risk in the stock market is more tied to valuation than to fear of a deteriorating economy or rising interest rates. We continue our focus on finding companies with strong balance sheets, solid free cash flow and dividend growth selling for reasonable valuations.

Craig A. Vander Molen, CFA, CPWA ®

Managing Director and Chief Market Strategist