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Market Perspectives - February 2019

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Market Perspectives - February 2019

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Market Perspectives - February 2019

  1. 1. Market Perspectives - February 2019 Experience Insight Impact Overview: With volatility reigning over the past few months, we refocus our analysis on earnings growth. Now that fourth quarter (Q4 2018) earnings season is largely complete, it appears companies in the S&P 500 experienced sales and earnings growth trends which remain on a steady, upward trajectory. However, concerns about future growth have surfaced in light of the global market volatility, certain economic indicators, and more challenging year-over-year comparisons. In 2019, companies will be lapping the prior year tax cut, which boosted 2018 growth rates. This month, we analyze recent trends and market expectations for the near future. 1
  2. 2. Corporate Earnings Rebound Continues Experience Insight Impact Year-over-year, Q4 S&P 500 sales grew 6.4%, while earnings grew 11.6%. The majority of sectors remained positive. As of 2/25/19, approximately 10% of the S&P 500 Companies have not yet reported earnings so these numbers may change somewhat. Source: Bloomberg 2
  3. 3. Earnings Were Generally Better Than Expected Experience Insight Impact Expectations remain essential to the investment process, and, similar to prior quarters, both sales and earnings beat consensus expectations on average. Reported sales exceeded the consensus estimate by 1% and earnings exceeded by approximately 3.5%. Source: Bloomberg 3
  4. 4. Earnings Growth Expected to Continue Experience Insight Impact The yellow oval highlights S&P 500 sales on top and earnings below. All data to the left of the oval represents historical results, while the bars to the right represent expectations for earnings and sales growth. Current outlooks for Q1 2019 imply slightly negative earnings growth, followed by more muted growth for the remainder of the year. As a reminder, 2018 growth was boosted (on a one-time basis) by the changes in tax policy. 4 Source: Bloomberg
  5. 5. What Does Slowing Earnings Growth Tell Us? Experience Insight Impact With earnings growth widely expected to slow in 2019, investors have begun to question overall economic conditions. In fact: • 13 of 22 S&P 500 Earnings Recessions (which is NOT currently expected) were NOT followed by economic recessions. • This particular cycle’s growth has been impacted by tax reform. Goldman Sachs believes “lower corporate tax rates contributed nearly half of the roughly 20% growth in S&P 500 earnings in 2018.” • With the P/E multiple for the S&P 500 only slightly above the average for the past decade, some of this earnings decline may be “baked in” to expectations. 5 Source: Goldman Sachs, Bloomberg
  6. 6. Market Perspective - February 2019 Experience Insight Impact Conclusion: Sales and earnings growth in 2018 exhibited strong positive trends. With 2019 upon us, forward-looking investors are skeptical that this level of growth will continue. Markets have, at least in part, adjusted to more muted expectations. Our approach to portfolio management remains flexible, and we will continue to analyze the evidence as it presents itself in the months ahead. 6
  7. 7. Disclaimer Experience Insight Impact Opinions expressed in this commentary may change as conditions warrant and is for informational purposes only. Information contained herein is not intended to be personal investment advice for any specific person for any particular purpose. We utilize information sources that we believe to be reliable but cannot guarantee the accuracy of those sources. Past performance is no guarantee of future performance; investing involves risk and may result in loss of capital. Consider seeking advice from a professional before implementing any investing strategy. 7

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