DeGroote MarketWatch

DeGroote Marketwatch is a student-generated weekly report on the financial markets.

Trader in Residence has concluded for the semester.

Week of October 13, 2017

Both Canadian and U.S. stocks were higher in the first week of the third quarter’s earnings season. While most of the companies that have released earnings so far are from the financial services sector, 81% have reported better-than-expected results. With stock valuations well above historical averages, we expect market gains will be driven by increasing corporate profits. This can come to fruition as U.S. earnings are expected to rise by 3% in the third quarter. Headlines from Washington remained in the spotlight as President Trump signed an executive order to cut off subsidy payments to insurance companies that provide Obamacare health plans, along with heightened concerns that the U.S. will leave the North American Free Trade Agreement.

Our Fourth Quarter Outlook


Economic Outlook 

Canada logged the fastest growth among ...

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Why This Earnings Season May Be the Best Yet For Stocks

The third quarter earnings season typically gives a significant boost to stock prices, CNBC reports. Using analytic tools developed by Kensho Technologies and typically deployed by hedge funds, CNBC found that the S&P 500 Index (SPX​) posts an average gain of 2.29% in the 30 days following the start of the third quarter earnings reporting season. This is based on the last 19 years of data, during which the S&P 500 advanced 15 times (79%) in that period following the first release of third quarter profits.

Tech, Industrial, Banks Lead

Looking at the S&P’s industry sectors, information technology, industrials, materials, and financials showed similarly strong upward bias at this time of year. The tech sector has posted an average return of 4.6 percent, double the average return of the S&P 500, in the 30 days after third quarter earnings season starts, according to Kensho, per CNBC.

Among the four quarterly corporate earnings reporting seasons, the third quarter is the one with the best average stock market performance, based on the Kensho-CNBC analysis. At the other end of the spectrum, the fourth quarter tends to be the worst. During that earnings season, the S&P 500 has been down 53% of the time, with an average loss of 1.12%. Rounding out the reporting year, the first quarter tends to be up, while the second quarter usually is down, per CNBC.

^SPX Chart

Positive Fundamentals

Setting aside recent historical trends, there are some fundamental reasons for investor optimism as the current earnings reporting season gets underway. For one, JPMorgan Chase & Co. equity strategists are predicting that Q3 EPS for the S&P 500 will hit a record $33.75, beating estimates by roughly 4.5%, CNBC indicates. “We are expecting another solid earnings season for S&P 500 companies…,” wrote Dubravko Lakos-Bujas, JPMorgan’s head of U.S. equity strategy, according to CNBC.

Low Borrowing Costs

Additionally, despite moves by the Federal Reserve to raise interest rates, they nonetheless remain low by historical standards, and this should give stock prices continued impetus, the Wall Street Journal reports. Also, corporate credit ratings are improving, with 42% fewer downgrades and 10% more upgrades so far in 2017 versus 2016, the Journal notes, citing data from S&P Global Ratings. Meanwhile, for energy companies with speculative bond ratings, their default rate has dropped from 3.5% in July to 3.3% in August as oil prices have stabilized, the Journal adds.

 

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World Market Performance

 

 

 

 

 

 

 

Level Change 1-week YTD 1-year 5-year
EQUITY INDICES CAD CAD CAD CAD
S&P/TSX 15,807.17 + 78.85 + 0.50% + 3.40% + 7.95% + 5.31%
S&P 500 2,553.17 + 3.84 – 0.18% + 6.06% + 13.34% + 17.93%
DJIA 22,871.72 + 98.05 + 0.10% + 7.64% + 19.64% + 16.98%
FTSE 100 7,535.44 + 12.57 + 1.70% + 5.69% + 10.99% + 6.56%
CAC 40 5,351.74 – 8.16 + 0.40% + 14.79% + 23.21% + 12.98%
DAX 12,991.87 + 35.93 + 0.83% + 18.01% + 26.53% + 15.93%
Nikkei 21,155.18 + 464.47 + 2.67% + 7.31% + 10.59% + 17.25%
Hang Seng 28,476.43 + 18.39 – 0.28% + 19.55% + 16.30% + 11.29%
CURRENCY RETURNS CAD Change
US$ 1.2480 – 0.0049 – 0.39% – 7.15% – 5.40% + 4.95%
Euro 1.4758 + 0.0062 + 0.43% + 4.41% + 1.18% + 3.06%
Yen 0.0112 + 0.0000 + 0.26% – 2.91% – 12.32% – 2.25%
CANADIAN TREASURIES Yield Change COMMODITIES USD Change
3-month 0.96 – 0.02 Oil $51.36 + $2.07
5-year 1.73 – 0.05 Gold $1,303.28 + $26.68
10-year 2.04 – 0.09 Natural Gas $3.01 + $0.10

 

 

 

Market at a Glance *

* Click image to see full size version

Economic Calendar

Date   Release Actual Consensus Prior
Mon
EUR Consumer Price Index – Core (Y0Y) 
1.3% 1.2% 1.3%
CAD Foreign portfolio investment in Canadian securities
23.95B 4.46B -0.86B
Tue
CADManufacturing Shipments (MoM)
-2.6%
-1.6% -1.9%
AUD RBA Meeting’s Minutes
`Wed
USD Fed Interest Rate Decision
1.25% 1.25% 1.25%
FOMC Economic Projections
Thur Consumer Price Index (YoY)
1.4%
1.5%
1.2%
 UK Prime Minister Theresa May speech  –
Fri ECB President Draghi’s Speech
ECB’s Praet Speech

 

DeGroote MarketWatch is a weekly financial newsletter prepared primarily by students. It is designed to inform and educate the community. It is an educational tool. The DeGroote School of Business is not responsible for the consequences of actions taken based on DeGroote MarketWatch.
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