North American equity markets ended the week in positive territory albeit barely. The S&P/TSX composite was up 0.9% buoyed by higher commodity prices. The S&P 500 was up 0.4% helped by low expectations for earnings results and continued hope that the Fed will eventually step in with additional quantitative easing. We are entering the heart of earnings season in the U.S. and results so far have been a mixed bag. As of the week ending last Friday, 94 companies in the S&P 500 have reported since the beginning of July and the growth rates for sales (+2.7%) and earnings (+0.3%) for Q2 are tracking at their slowest pace since Q3 2009. The low expectations into earnings have helped several major index components move higher on what might normally be considered to be lackluster earnings reports. Results are coming in above expectations as earnings have surprised to the upside by 5.1%. However, with more than 175 companies set to announce results this week, it is still too early to call one way or the other. The positive returns year-to-date for the U.S. equity markets seem to suggest a return to fundamentals and that any upside will be rewarded. Whereas, the bond market is expecting the world to fall apart, with negative 2 year yields for German Bunds and U.S. 10-year yields hovering around 1.45% and trending lower. A winner in the tug of war between equity and fixed income markets has yet to be determined. The biggest factor in this struggle is what we know versus what we don’t. We know that valuations look attractive, earnings are coming in near expectations and corporate fundamentals remain strong, including record levels of cash on balance sheets. What we don’t know is the macro-economic situation around the world including but not limited to;
Given this current environment, stock selection within equity markets remains paramount. Investing in good quality businesses that generate cash and have the potential to grow earnings will help mitigate downside risk, should some of the unknown risks become known.
Philip Petursson is Managing Director, Portfolio Advisory Group, providing insights on investment strategies, asset allocation and economic, equity and fixed income markets.
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