The S&P 500 has been in a holding pattern since June. Will third-quarter earnings reports trigger an upward breakout? BlackRock’s Richard Turnill provides our take, with the help of this week’s chart.
The S&P 500 has been in a holding pattern since the June Brexit vote, trading within a narrow range. But third-quarter U.S. earnings reports are unlikely to trigger an upward breakout, we believe. This week’s chart helps explain why.
Analysts earlier this year were expecting the earnings headwinds of falling oil prices and a stronger U.S. dollar to diminish, driving better earnings-per-share growth in the U.S. by the end of 2016. This is evident in the upward trajectory of the chart’s blue line during the second quarter of 2016, as oil prices rallied and the U.S. dollar weakened.
No earnings-fueled takeoff ahead
But this year seems to be no exception to the annual pattern of analysts steadily lowering expectations. See the most recent downward shift in the chart’s blue line. In fact, analysts have cut third-quarter U.S. earnings expectations by 8% since the start of the year—bigger than the downward revisions in the first two quarters.
Early third-quarter earnings have beaten these reduced expectations at a higher-than-average rate. Yet fewer companies are raising their future guidance than in a typical quarter. Political uncertainty in the U.S. gives companies more reason to hold off on investment. Firms are likely to express similar caution this week when more than one third of the S&P 500 reports earnings.
Ultimately, we believe earnings beats in this environment won’t be enough to spur a sustained rally, especially given how expensive U.S. valuations are relative to history. We see greater clarity on future Federal Reserve policy and the political outlook as more likely to drive risk appetite and stock performance in the months ahead.
Against this backdrop, we like U.S. companies able to increase revenues and earnings in a low-growth world, such as selected technology stocks. We’re cautious of traditional dividend payers and prefer dividend growers instead. Outside the U.S., we prefer Asia ex-Japan stocks whose earnings momentum is improving. Read more market insights in my Weekly Commentary.
The SPDR S&P 500 ETF Trust (NYSE:SPY) fell $0.56 (-0.26%) to $214.33 per share in Tuesday afternoon trading. Year-to-date, the largest ETF tracking the S&P 500 index has risen 4.96%.
This article is brought to you courtesy of BlackRock.