Legacy Wealth Weekly - Oct 14, 2016 (Earnings Time)

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Weekly Market Wrap-Up: Earnings Time

US equities are down a fraction this week. However, through Thursday’s down session, the S&P 500 successfully tested and rebounded from its 100-dma (2,115). Canadian stocks are up a little for the week, thanks to the strong showing of the energy (more speculation of a Saudi Arabian-Russian deal) and financial sectors (rising bond yields and EPS beats at large US banks). Interestingly, a further strengthening in the US$ (DXY up ~1.4%) has not caused much damage to equities. Maybe there is a growing acceptance among investors that the stock market and multinationals can absorb a higher dollar (and higher rates) provided it is going up for good economic reasons. Otherwise, Samsung’s announcement that it is halting production of its Galaxy 7 smartphone looks like Apple’s gain. Apple (up ~3% this week) is the largest constituent in the S&P 500. Last, BoE Governor Carney mentioned this week that he could tolerate higher inflation than normal in order to protect UK growth next year. We believe Governor Poloz could make similar comments when the Bank of Canada releases its quarterly Monetary Policy Report next Wednesday. We believe the BoC will present a somber economic outlook.

This week marks the beginning of the Q3 earnings season. Analysts are looking for S&P 500 EPS and revenue growth of -0.4% and 3.3% respectively. Excluding the energy sector, those estimates are at 2.4% and 4.2%. Given the tendency for analysts to sandbag estimates, S&P 500 EPS growth should turn positive and exit the profit recession. Our focus this week is on relative EPS strength among S&P/TSX sectors. Our Chart of the Week shows the three-month change in analysts’ one-year-forward EPS estimates. We can see that the energy (+54%) and basic materials (+28%) sectors enjoy the biggest positive changes. Unsurprisingly, these sectors also lead the S&P/TSX YTD and their relative EPS strength validates our pro-cyclical sector strategy. That said, given the strong price appreciation YTD, it will be very important especially for companies in these two sectors to meet or beat Q3 estimates in order to maintain their market leadership. Stay tuned!

Regarding economic statistics this week, in Canada, new-home price inflation moderated a notch (2.7% YoY, from 2.8%). Time will tell if new mortgage rules will moderate housing prices going forward. In the US, September retail sales growth improved (2.7% YoY, from 1.9%) , fueled by sales at gasoline stations (+2.4% MoM). Producer prices advanced 0.7% YoY (from 0%) but the NFIB disappointed (94.1, from 94.4) as weaker inventories and job openings more than offset the improvement in business expectations. Otherwise, the FOMC Minutes for the September meeting described the decision as a close call, with several participants saying that a rate hike would be appropriate “relatively soon” (i.e., December). Elsewhere, in China, the Caixin service PMI came in virtually unchanged at 52 but the CPI jumped to 1.9% YoY (from 1.3%). Producer prices exited deflation territory (+0.1% YoY) for the first time since 2012, thanks to the Chinese yuan depreciation. Higher prices should help companies to service their debt. Unfortunately, exports and imports dropped 10% YoY (from -2.8%) and 1.9% YoY (from +1.5%), respectively, moderating investors’ enthusiasm. Finally, in India, inflation weakened to 4.3% (from 5.1%), justifying the surprise rate cut by the RBI last week.

Next week, in Canada, we will focus on retail sales, inflation and the BoC. In the US, we await industrial production, inflation and several housing statistics. In Europe, the ECB is on deck. Finally, in China, we will closely watch housing prices, industrial production, retail sales and GDP growth statistics.

The Canaccord Genuity research included in the Legacy Wealth Weekly is solely for Canadian residents. To subscribe to our weekly newsletter, click here.

Legacy Wealth Partners