Weekly Headings

Equities remain near all-time highs, as the S&P 500 closed at a record high two times this week and is now up 17.1% year-to-date, the best start to a year on a price return basis since 1987. Supporting factors for the equity market have been the reluctance of the Federal Reserve (Fed) to continue on the path of policy normalization (evidenced by the Fed leaving interest rates unchanged at the May Federal Open Market Committee (FOMC) meeting), rising optimism for a U.S./China trade deal (which is reported to take place as early as next week), still solid domestic fundamentals (highlighted by elevated productivity growth and the April employment report this morning that showed that the U.S. economy added 263k jobs in April) and a strong 1Q19 earnings season. With ~75% of S&P 500 companies having reported, below are some of the key takeaways thus far from the 1Q19 earnings season:

1. Negative Earnings Growth Avoided | Fears of an earnings recession were elevated heading into the 1Q19 earnings season, as the 6% downward revision in the 12 weeks leading up to the end of the first quarter (the largest 12-week downward revision since 1Q16) brought the consensus 1Q19 earnings growth forecast to -2.9% Year-over-Year (YoY). These fears have subsided, as better than expected earnings has led the 1Q19 S&P 500 earnings forecast to be revised 3.9% higher since the start of earnings season, bringing the blended 1Q19 earnings growth forecast to +0.4% YoY. With 25% of companies yet to report, 1Q19 earnings growth is likely to trend higher and approach 1% by the time it is completed. Major companies reporting earnings next week are Disney and Bookings Holdings.

2. Cyclicals Lead the Charge | While Health Care saw the strongest earnings growth (+10.0% Year-over-Year (YoY)) in the first quarter, it has been more cyclical sectors that have driven earnings as Consumer Discretionary (+7.7% YoY), Industrials (+6.7% YoY) and Financials (+5.8% YoY) have seen the strongest earnings growth. As cyclical sectors such as Financials, Consumer Discretionary and Industrials are also expected to see the strongest earnings growth throughout all of 2019, this reinforces our view of favoring cyclicals over defensives.