Q2 Earnings Season – A Welcome Distraction

The major market indices finished the week mixed to modestly higher as the strong start to second quarter earnings season offset concerns over the economic impact of a brewing trade war.

July 23, 2018    |    By Mike Schwager

Performance for Week Ending 7/20/18:

The Dow Jones Industrial Average (Dow) added 0.15%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) gained 0.09%, the Standard & Poor’s 500 Index (S&P 500) closed up 0.02% and the Nasdaq Composite Index (NASDAQ) shed 0.07%. Sector breadth was mixed with 4 of the S&P sector groups finishing higher while 7 closed lower. The Financials sector (+2.22%) was the best performer while the Energy sector (-1.89%) was the worst.

Index* Closing Price 7/20/2018 Percentage Change for Week Ending 7/20/2018 Year-to-Date Percentage Change Through 7/20/2018
Dow 25058.12 +0.15% +1.37%
Wilshire 5000 29287.52 +0.09% +5.44%
S&P 500 2801.83 +0.02% +4.80%
NASDAQ 7820.20 -0.07% +13.28%

*See below for Index Definitions

MARKET OBSERVATIONS: 7/16/2018 – 7/20/2018

The major market indices finished the week mixed to modestly higher as the strong start to second quarter earnings season offset concerns over the economic impact of a brewing trade war. This week’s advance marks the third consecutive weekly gain for both the Dow and S&P 500.

Earnings season couldn’t have come at a better time as it is providing a favorable distraction from the ongoing trade war rhetoric. Even with the bar set very high heading into the quarter, results so far have been almost universally positive. Through Friday, 86 members of the S&P 500 have reported results with 94% surprising to the upside. Aggregate earnings growth is running at a 23.2% pace on a 10.1% uptick in revenues. When all is said and done, analysts are forecasting that second quarter earnings will advance by better than 20%, marking the second straight quarter of 20%-plus growth. According to consensus expectation from Bloomberg, full year 2018 earnings growth is currently forecast to rise by nearly 24%.

While trade war concerns haven’t been very impactful on corporate results, concerns are starting to rise. The Fed’s "Beige Book" survey of regional business sentiment for June said manufacturers in all 12 of the districts it polled "expressed concern about tariffs and in many districts reported higher prices and supply disruptions that they attributed to the new trade policies." Fed Chair Powell echoed those concerns during his testimony to congressional lawmakers in Washington, telling the House Financial Services Committee that while "we don't see it in the aggregate numbers yet because it is a $20 trillion dollar economy and these things take time to show up ... we hear many stories of companies that are concerned and are now beginning to make investment decisions, or not make them, because of this." In other words, trade uncertainty could begin to reshape strategic and spending plans at the corporate level, which in turn, could have wider implications for the broader economy.

Market Outlook: The environment in the months ahead could prove a bit more challenging for equity investors due to trade tensions, uncertainty over the economic impact of tariffs, and political turmoil leading up to the midterm elections. While the underlying fundamental environment remains supportive and earnings growth is expected to be solid through the remainder of the year, rising interest rates and higher inflation expectations could limit the expansion in the market’s P/E multiple. While a rerating of valuation multiples higher seems limited, the contraction in valuation multiples over the course of the past few months and record levels of corporate buyback activity, should help buffer the downside in equity prices.

With the economy near full employment and monetary policy set to get tighter, the markets overall risk/reward is looking slightly less attractive. As we look out through the summer months a choppy sideways trading range seems likely. However, as we begin to get clarity on the trade situation and the outcome to the midterm elections, the focus should return to the fundamental environment, which in turn, could set the stage for better performance towards the latter part of the year. According to Guggenheim Research, markets often find their footing about 30-days ahead of the mid-terms and have generally produced solid gains during the six months period following the election.

Historically bull markets continue until there are growing signs of recession. As a firm, we are not forecasting a recession until early 2020. Investors tend to discount the arrival of recession by about eight months, on average, before it actually begins, suggesting the market still has room to advance but could begin to face some headwinds around mid/late next year.

The Week Ahead: The earnings floodgates will open up during the coming week with 170 members of the S&P 500 index scheduled to report. Included in this group are 11 members of the Dow Jones Industrial Average. Reports of interest on the data calendar include; June existing home sales, the July Purchasing Managers’ Index (PMI), June new home sales, June durable goods orders and the initial estimate of second-quarter gross domestic product (GDP). On the political front, President Trump will meet with European Commission President Jean-Claude Juncker with the likely focus being on auto tariffs.


The Dow Jones Industrial Average is a price-weighted average of 30 blue-chip stocks that are generally defined as the leaders in their industry. It has been a widely followed indicator of the stock market since October 1, 1928.

Wilshire 5000 Total Market IndexSM represents the broadest index for the U.S. equity market, measuring the performance of all U.S. equity securities with readily available price data. The index is comprised of virtually every stock that: the firm's headquarters are based in the U.S.; the stock is actively traded on a U.S. exchange; the stock has widely available pricing information (this disqualifies bulletin board, or over-the-counter stocks). The index is market cap weighted, meaning that the firms with the highest market value account for a larger portion of the index.

Standard and Poor's 500© Index is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

The NASDAQ Composite Index is a broad-based capitalization-weighted index of stocks in all three NASDAQ tiers: Global Select, Global Market and Capital Market. The index was developed with a base level of 100 as of February 5, 1971.

This material contains opinions of the author, but not necessarily those of Guggenheim Partners, LLC or its subsidiaries. The opinions contained herein are subject to change without notice. Forward looking statements, estimates, and certain information contained herein are based upon proprietary and non-proprietary research and other sources. Information contained herein has been obtained from sources believed to be reliable, but are not assured as to accuracy. Past performance is not indicative of future results. There is neither representation nor warranty as to the current accuracy of, nor liability for, decisions based on such information. No part of this material may be reproduced or referred to in any form, without express written permission of Guggenheim Partners, LLC.

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