• Q2 Earnings set to hit record high as Tech, Healthcare, and Fins beat estimates.
  • Dallas Fed Index ticked higher, but that was before the Hurricane.
  • Italian confidence turns higher.


With the second quarter earnings season winding down, it appears that Q2 S&P 500 earnings will be a new record high.  As of August 24th, 494 of the S&P 500 Index companies have reported Q2 earnings, of which 348 have beaten earnings (70.45%) and 100 have missed (20.24%), albeit on lowered estimates.  This is slightly lower than the prior quarters 73.96% beat rate but well above the five year average of 67.89%.  Thus far, the beats have been led by the Health Care, Tech, and Financial sectors, as 56 out of the 66 Tech that reported earnings, 49 of 60 Health Care companies that reported earnings, and 49 out of the 66 Financials companies that reported earnings have beaten estimates.




Over the past two weeks, Wall Street analysts lowered their Q2 EPS estimates by -$0.26/share to $30.52.  Thus, the street also lowered their 2017 EPS estimates by -$0.20/share to $126.94; however, they raised their 2018 EPS estimates by +$0.23/share to $144.65.  This implies EPS growth of +19.5% Y/Y and +14.0% Y/Y in 2017 and 2018, respectively.  For the reasons mentioned above, we are still below those lofty forecasts, but we still see strong EPS growth for 2017 and 2018.





Today, the Dallas Federal Reserve reported that the Current General Business Activity Index increased +0.2 points to +17.0 in the month of August Note that this month marks the 11th consecutive month of growth in the region and the highest level since May.  However, Hurricane Harvey may dampen growth over the next few weeks.  In the month, many of the current categories remain elevated and there were notable improvements in Shipments (+6.5 points to 18.1), Wages (+6.3 points to 26.9), Average Workweek (+4.7 points to 14.5), and Capital Expenditures (+2.9 points to 14.5).  Lastly, manufacturers had a slightly less positive business outlook, as the Forecast slipped -2.4 points to +29.2.





According to preliminary estimates from the U.S. Census Bureau, Wholesale inventories increased for the third consecutive month, up +0.43% M/M to $601.23 billion in July.  Moreover, on a Y/Y basis, inventories increased +3.08% Y/Y (versus +2.66% prior) Durable Goods inventories increased +0.61% M/M and Non-Durable Goods inventories increased +0.14% M/M.


According to iStat, the Italian Economic Sentiment Index rebounded +1.5 points 107.0 in the month of August.  Furthermore, Italian Consumer Confidence Index increased for the third consecutive month, up +3.9 points to 110.8 (highest level since December 2016).  Lastly, the Italian Business Manufacturing Confidence Index also increased for the third consecutive month, up +0.3 points to 108.1 in August, which is the highest level since December 2007.





U.S. GDP:  Our GDP model points toward stronger growth in the quarters ahead (+2.8% Real GDP growth in 2H 2017, and 3% growth in 2018) given improvements in workforce population growth, workforce participation, and low interest rates and energy prices.  However, given that 1H 2017 GDP is currently estimated at just 2.0% growth, it will be difficult for GDP to achieve our official forecast of 3.0% for 2017.

U.S. Inflation:  U.S. CPI appears to have peaked and the Fed’s preferred inflation metric, the Core PCE Deflator, increased +1.5% Y/Y in June (away from the Fed’s 2% inflation target).  As we anniversary the drop in commodities prices, we expect headline inflation has hit a near-term peak, taking pressure off of the Fed’s current hawkish rate stance.

U.S. Federal Reserve:  Given our belief that U.S. inflation peaked for the year a few months ago, we believe the FOMC will become increasingly more data-dependent.  We believe the odds of another Fed hike in 2017 have come down given recent declines in inflation.  The odds of balance sheet reduction should also decline as well, although the street expects balance sheet action to begin in September.

U.S. Treasuries:  With headline CPI having hit a near-term peak of 2.7% Y/Y, we believe the 10-year U.S. Treasury is now range-bound through the end of the year.  We would be inclined to be buyers of Treasuries if the 10-year yield were to approach its recent high of 2.63%.

U.S. Equities and Earnings:  S&P 500 operating earnings will rise materially in 2017, but our yearend S&P 500 target of 2400 has already been attained.  In fact, we believe the S&P is now fully valued.  We continue to favor the homebuilders, given the demographic tailwind and lack of inventory and are encouraged by the improvement in pending home sales.

Argentina:  In short, the economic data out of Argentina remains bad (but less bad than it was a year ago).   Industrial Production increased +6.6% Y/Y in June (+2.7% Y/Y prior), CPI is up +22.9% Y/Y in June (+23.4% Y/Y prior), Consumer Confidence remains depressed but ticked higher in August, and GDP is up just +0.3% Y/Y.

Brazil:  The macro data in Brazil continue to improve.  Retail sales are now up +3.0% Y/Y, unemployment has fallen for three straight months to 13%, PMI’s continue to trend higher, tax receipts are growing, inflation is falling – which allows the central bank to cut rates further, and GDP is about to turn positive on a Y/Y basis.  Of all the major global bond markets, Brazilian 10-year bond yields are the richest in the world at 10%.  As the economy improves, and inflation cools, we would expect to see investors reach for yield in Brazil.   As such, we initiated a Long Brazil 10-Year Sovereign Bond view last week.

Canada: Given concerns about Canada’s housing market (Existing home sales fell again in July and Building Permits are slowing) and potential fallout from lower oil prices, we added Canada to our downside risk watch; however, so far Canada’s economic data remain healthy.  Consumer Confidence remains at high levels, manufacturing PMI’s remain strong, unemployment has been in a declining trend, retail sales are accelerating, and Canada’s monthly GDP continues to improve (+4.6% Y/Y in May).

Mexico: Unemployment continues to improve (3.2% in July), and Consumer Confidence continues to improve, but Retail Sales slowed significantly in June (+0.4% Y/Y vs. +4.1 Y/Y prior).   Furthermore, Manufacturing PMI and Orders indicated slower growth in July and Inflation is still in a rising trend.

Venezuela: We will leave this as a placeholder in the event that Venezuela ever becomes an investible market again.  We are hopeful …


United Kingdom The U.K. economy remains resilient.  Consumer Confidence has deteriorated, Retail Sales slowed in July, and Q2 GDP slowed to 1.7% Y/Y (+2.0% prior); however, Unemployment continues to decline, home price gains are steady, inflation is in an uptrend, and PMI’s improved in July.  We are watching the U.K. for further deterioration.   

European Union:  Economic data has recently slowed in Europe.  PMIs indicate slower growth, Industrial Production fell -0.6% M/M, and Consumer Confidence remains negative.  However, we are seeing improvement in Southern EU nations as well (including Greece). As such, we remain bullish on the Euro STOXX 50 Index.

European Central Banks:  The ECB is doing exactly what we thought they would do by favoring asset purchases over furthering lowering rates into negative territory and now the ECB is facing rising inflation.  The ECB has now begun to taper its asset purchases and certainly a discussion will begin on the process of how/when to raise rates.  We will watch to see if ECB tapering has any meaningful impact on zero (or near-zero) interest rates throughout the continent.

Eastern Europe: We continue to believe risks remain for Eastern Europe given high Debt/GDP levels, most notably Cyprus (104%), Croatia (88%, up from 66% at the end of 2013), and Slovenia (81%).   Yet, economic data have been robust this year across most of Eastern Europe.

South Africa:  Political chaos and debt downgrade risk aside, South African data improved in Q2 (higher PMI’s, higher retail sales, lower inflation, and improving business confidence), however, Unemployment remains persistently high at 27.7%.  

Turkey:  Despite the political situation, the macro backdrop has been strong.   Consumer confidence has been rising for months, business confidence increased in June, Unemployment is turning lower again, and inflation has reversed its recent rising trend.  One area to watch for signs of weakness is housing as Home Prices slowed slightly in May (still up +12.6% versus +13.1% prior) followed by a sharp decline in home sales thereafter (-8.1% Y/Y in June).   Furthermore, industrial production declined -3.6% Y/Y in June. Note that July manufacturing PMI slowed slightly as well.


Australia: The RBA has cut rates twice in the past year and Australian data is holding up.  So far, business and consumer confidence have been strong, the job market has been steady, and PMI’s have held up, despite weakness in commodities prices.    So far, housing data remains steady, but recent data have shown some weakness.  We remain neutral on Australia at this time, on concerns about China exposure but so far China is still posting strong data.

China:   Recent data suggest some modest improvement in China’s manufacturing sector.  Note that China Industrial profits were up a solid +16.5% Y/Y in July, and China’s consumer and services sectors remain resilient.  We continue to believe China has the levers necessary to stimulate ahead of the National Communist Party Congress later this year, but we are watching for further signs of stress within China’s credit and housing markets.

 India:  Indian economic activity took a nosedive in July following the new Goods and Services Tax (GST) as PMI’s fell into contractionary territory.  This downturn in activity follows months of weakening durable goods sales and slowing industrial production.  With the SENSEX index just off its all-time high and up 21% this year, we are monitoring India for further deterioration, but a de-escalation on the border with China should help markets.  Given declines in inflation, the central bank cut rates this month.

Indonesia:  Indonesia’s GDP and Private Consumption Expenditures have been stable at 5% Y/Y, but Consumer Confidence and inflation appear to be turning higher.  As a result, it is reasonable to assume that the central bank’s dovish policy stance (six rate cuts in 2016) may revert to a more neutral stance this year.

Japan:  We have a bullish view on Japan’s Nikkei 225 given improvement in Japan economic activity, employment, and small business confidence, although the weakness in PMI’s over the past two months raises concern.  Bank lending is improving on a Y/Y basis in Japan, unemployment continues to improve, industrial production remains elevated, and consumer confidence remains in a slow up-trend.

Russia: Russian economic data continue to suggest economic growth as GDP accelerated in Q2, although PMI’s slowed in July on the back of lower oil prices.  However, Retail Sales have rebounded, Real Disposable Income and Wages have turned up, and Unemployment rate improved to 5.1% in June (4 straight months of improvement).  Meanwhile, inflation is moderating, which allowed the Bank of Russia to cut rates once again.  Russian equities remain the cheapest in the industrialized world and we remain bullish.







































This publication is for Institutional Investor use only and not for distribution to the general public. The comments herein are based on the author’s opinion at a particular point in time and may change at any time without notice. Merion Capital Group does not guarantee the accuracy or completeness of the information contained herein. Merion Capital Group is a FINRA-registered broker-dealer. Merion Capital Group shares in the commissions for trades that are executed through Tourmaline Partners, LLC, a FINRA-registered broker-dealer. This report is distributed for informational purposes only and should not be construed as investment advice or a recommendation to sell or buy any security or other investment, or undertake any investment strategy. It does not constitute a general or personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual investors. Past performance is not a guarantee of future performance. All investments involve risk, including the loss of all of the original capital invested.


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