- Tech and energy shares weigh on S&P 500 after new record high.
- Key economic reports show continued strength.
- Third quarter earnings expectations remain bright.
- No discernible progress on trade talks.
- The Week Ahead: Upcoming reports will cover a wide range of economic areas.
Tech and energy shares weigh on S&P 500 after new record high.
Fears won the battle over facts in the latest week. After closing out August at a record high, the S&P 500 fell nearly 1% in the holiday-shortened week. While most sectors in the index fell, weakness in technology and energy stocks accounted for most of the decline. A lack of progress on trade talks, fears of increased technology regulation and renewed weakness in oil prices were blamed for the selloff. Stronger than expected manufacturing and employment reports also rekindled concerns that the Federal Reserve might raise interest rates faster than expected. The tensions weighed even more heavily on small cap and international performance.
The yield on the 10-year Treasury rose back up to near 3% pushing down the Bloomberg Barclays Aggregate Bond Index by -0.47%. In other markets, oil and gold prices declined, while the value of the dollar rose.
Key economic reports show continued strength.
A stronger than expected increase in the August ISM Manufacturing index suggested continued manufacturing momentum despite current trade fears. In addition, employment also beat estimates in August which should help fuel future consumer income and spending. Third quarter GDP growth is currently tracking at an above-average 4.4% rate according to the Atlanta Fed. Wages also rose faster than expected and were up a cycle high 2.9% from a year ago. All this is positive for future consumer spending, but the strength may also prompt the Federal Reserve to raise interest rates faster than expected.
Third quarter earnings expectations remain bright.
The near-term corporate earnings outlook remains very favorable and should help support stock prices. The healthy economy, tax reform and regulatory rollbacks are positives for third quarter earnings growth, which is currently estimated to rise 20% from a year ago. Actual growth usually exceeds estimates. If actual results match estimates, it would be the strongest third quarter growth since 2010.
No discernible progress on trade talks.
Trade talks with Canada showed no apparent signs of progress, and President Trump reiterated a threat to raise tariffs on virtually all Chinese imports.
Via Nova believes all parties are interested in reaching a deal, and that none want an all-out trade war. However, we also believe that progress on tariff reductions is historically very slow. This view suggests to us that trade tensions could remain a cloud over an other wise positive outlook. Any signs that tensions are easing would likely be positive for stocks.
The Week Ahead: Upcoming reports will cover a wide range of economic areas. Apple’s product event is Wednesday.
The economic calendar is quite full in the coming week, with reports on small business optimism, production, inflation and retail sales. We are focusing on the consumer spending data as perhaps the most useful measures of economic strength and confidence, and the consensus estimate for August retail sales is a healthy 0.4% gain.
On Wednesday, Apple is scheduled to unveil its new product lineup. While the event is not a measure of economic strength, it does garner a great deal of interest and commentary. If the new products are perceived as innovative, analysts may raise spending estimates for the upcoming holiday spending season. Yes, Christmas is coming already!