The global equity bull market is alive and well, with very broad participation. Longer-term technicals continue to look very healthy and strong, even as the bull market and economic recovery in the U.S. turns eight years old. A closer look at key indexes suggests the path of least resistance remains higher for stocks, although it likely won’t be an easy ride, as volatility could creep higher during the second half of 2017.
As June ends and summer sets in, markets continue to track near all-time highs and volatility remains low. As we turn the page to July, there will be plenty of significant events for markets to watch such as the June employment report, the start of earnings season, and an action packed week later in the month which will see three major central banks meet within a one-week period. It is always important to stay on top of major market events, and to help we’ve created this guide to the July 2017 market calendar.
We continue to look for the U.S. gross domestic product (GDP) to expand near 2.5% in 2017, although potential delays in passing major fiscal policies introduce some risk to the downside. This below-trend pace is still somewhat stronger than the trajectory that the economy has experienced throughout the expansion [Figure 1], as employment, income, production, and sales have failed to reach levels achieved in prior economic cycles.
We forecast 6–9% returns for the S&P 500 Index in 2017. As investors increasingly trust that the economy can stand on its own without the need of monetary policy support, business fundamentals should take over as the primary market engine and corporate profits will take on increasing importance. We have slightly raised our 2017 S&P 500 Index total return forecast to 6–9%, commensurate with expected earnings gains.
Overseas earnings were even better than expected during the first quarter (Q1) of 2017. Global equity analysts were looking for strong earnings growth from overseas companies after years of flat to declining earnings; for the most part, those markets delivered. Stock markets themselves responded, with international markets generally outperforming the S&P 500 Index. Frequently after earnings are released, analysts may reduce future growth expectations, often based on conservative comments from companies as they manage expectations. However, earnings expectations only decreased modestly during this period, and actually increased further for some regions. It is great to see continued optimism on corporate fundamentals, but it could prove challenging for companies to outpace expectations again.
The Federal Open Market Committee (FOMC) meeting will take place on Tuesday and Wednesday (June 13 – 14, 2017) and will be followed by an FOMC statement released at 2:00 p.m. ET on Wednesday, June 14, 2017. Along with the statement, the FOMC will also release a new set of economic forecasts (gross domestic product [GDP], the unemployment rate, inflation, and fed funds projections, also known as the “dot plots”). Federal Reserve (Fed) Chair Yellen’s post-FOMC meeting press conference — her second of 2017 — starts at 2:30 p.m. ET.
Master limited partnerships (MLP) appear to be a natural way to invest in the changing energy landscape. MLPs are exclusively focused energy infrastructure in the United States and Canada. North American energy production has become a dominant factor in the price of oil and in the North American drive to be energy independent. Yet, the pricing and performance of MLPs can be complicated, influenced by systemic factors, such as the prices of oil and gas, interest rates, and movement in the equity markets. MLPs are also influenced by the degree of success of each individual partnership, in the same way that traditional stocks’ performances are determined by both market and individual factors. Despite recent performance, we believe that the sector may still represent a good long-term investment option to potentially profit from increased North American energy production.
The latest edition of the Federal Reserve’s (Fed) Beige Book, released Wednesday, May 31, 2017, continued to deliver a positive view of the U.S. economy. The Beige Book is a qualitative assessment of the domestic economy and each of the 12 Fed districts individually. The report is prepared eight times per year, ahead of each of the eight Federal Open Market Committee (FOMC) meetings. We believe the Beige Book is best interpreted by measuring how the key words change over time. The qualitative inputs for the May 2017 Beige Book were collected in April 2017 through May 22, 2017.
Another earnings season is in the books and it was a good one. With more than 90% of S&P 500 companies having reported first quarter 2017 results, S&P 500 earnings are tracking to a solid year-over-year increase of more than 14% (Thomson Reuters data). That mark, should it stand throughout the remainder of reporting season, would represent the best pace of earnings growth since the third quarter of 2011. Further, outlooks from corporate management teams have generally been upbeat. Corporate America’s ability to produce strong profits despite sub-par economic growth has been impressive, providing a solid backdrop for stocks and economically sensitive bonds.