After a synchronized global recovery during 2016-2017, U.S. markets have experienced a positive divergence from most world economies in 2018. The strengthening economy, increased earnings estimates and rising stock prices fueled U.S. markets while many global economies weakened. Following the enactment of the 2017 Tax Cut and Jobs Act, “strong” U.S. earnings became “stellar” earnings with the S&P 500 Index earnings growth estimate topping 20.0% versus the STOXX 600 Index of 9.0%.
The U.S. economy is now experiencing a Goldilocks period where growth isn’t too hot to cause inflation, nor too cold to create a recession. With earnings near the highest point in the last decade, there is a strong possibility of a peak this year. Expectations are moderate for 2019, with projections of global earnings to be in line throughout the U.S., Europe and Asia with U.S. estimated growth of 10.3% and STOXX 600 Index growth of 8.1%.
Corporate earnings, while still impressive, are projected to slow in the third quarter from the breakneck pace in the first half of the year. According to FactSet, the S&P 500 Index quarterly estimated earnings growth is 19.3%, if achieved, will be the third highest growth rate since the first quarter 2011 rate of 19.5%, trailing only the two previous quarters this year.
Looking forward, estimates for the fourth quarter are slightly lower at 17.3% with revenue growth of 6.1%. For the calendar year, the U.S. is slated for GDP growth of 3.5%-4.0% combined with 20.4% year-over-year earnings increase and 8.1% revenue growth. After the previous market peak in January, increasing profit growth eased investor concerns that equities were overvalued, which propelled the market higher over the last few quarters.
While estimates remain strong for the balance of the year, several unknowns could dampen the market such as trade tensions, mid-term elections, wage pressure and higher interest rates. Over the course of a full market cycle, all good things eventually come to an end as analysts project a more temperate 2019 with the following S&P 500 Index estimates:
- Q1 2019 earnings growth 7.1%, revenue growth 6.3%
- Q2 2019 earnings growth 7.3%, revenue growth 4.5%
- CY 2019 earnings growth 10.3%, revenue growth 5.3%
For the quarter, Healthcare and Technology were the top performing sectors, rising 14.0% and 12.0% respectively. The Material and Energy sectors were the weakest, down slightly 0.14% and 0.11%. The High Dividend Equity portfolio’s exposure to Consumer Discretionary, Healthcare and Technology contributed to outperformance versus the Russell 1000 Value Index on a net basis.
Our current outlook on the economy and interest rates resulted in a smaller percentage of the portfolio invested in underperforming sectors such as Energy, REITs and Materials. The major pharmaceutical companies rallied on higher profits posting their strongest performance in five years and trailing only Technology and Consumer Discretionary for the year.
Top performing stocks over the quarter included DSW, Inc. up 32.2%, Apple, Inc. rising 22.3%, and Progressive Corp. up higher by 20.1%. The worst performing stocks were Las Vegas Sands Corp. declining 21.3%, Huntsman Corp. down 12.8%, and Anglo American, PLC lower by 10.6%.
Sources: Factset, Ned Davis Research, Bloomberg
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