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By Robert Landry, CFA, Portfolio Manager of USAA Investment Solutions




While we are still early in the third-quarter earnings season, there have been some pleasant surprises that hint at the possibility that the reality may not be as rough as the forecast.


The forecast is that the U.S. earnings recession will continue for a sixth straight quarter; the Standard & Poor’s 500 is expected to post earnings growth of -1.8% for the three months ended in September, according to the financial data firm FactSet. This is nothing to crow about, but it is trending in the right direction, given that expectations were even more negative as the quarter ended.


Only a tenth of the S&P have reported their 3Q numbers so far, and a higher-than-usual percentage of them are exceeding analyst estimates on both revenue and profits. On top of that, the extent to which they are surpassing those estimates is also significantly above the long-term average.


If this trend keeps up, overall earnings growth will beat Wall Street’s weak outlook, and it may even be able to push into positive territory. Thomson Reuters, in fact, said Wednesday that its data shows 3Q earnings moving into the black.


Financial stocks are generating the biggest boost to earnings growth. The largest banks, which used gains from trading activity to counter the drag of ultra-low interest rates, saw their share prices jump by as much as 2% on the news. Also faring well in early reporting are health care providers and technology companies, including online media.




At the other end of the expectations spectrum is the energy sector, which is still dealing with a tough oil market. The forecast predicts that S&P energy companies will see a 72% drop in earnings and a 13% decline in revenue compared to the third quarter of 2015. Industrials are also expected to lag, in large part due to struggling airlines.


Stocks overall are on the expensive side, based on both forward and trailing earnings, so in our view, there’s not much room for price multiple expansion. Valuations for dividend-paying stocks like utilities, telecom and consumer staples are particularly rich, as they’ve been driven up by income-seeking investors. Opportunities are still out there, though selectivity is key. Our research is turning up promising dividend growers in health care, tech and even among certain financials.


It’s a challenge for companies to grow their top and bottom lines in a slow-growth economy like the one we’ve endured for the past several years. So when the Federal Reserve Bank of Atlanta estimated in early August that the U.S. economy would expand by 3.8% in the third quarter, markets did a little dance. Finally, the economy was taking off.


Alas, it was all too good to be true. The Atlanta Fed’s GDPNow number has since been in steep decline due to a long string of uninspiring economic data. Its latest estimate came out Wednesday at 2%, little more than half what it was just a couple of months ago. Reports from other data compilers reinforce the weakening growth outlook. We’ll know soon enough, as the Commerce Department’s first print on 3Q GDP comes out next week.


This softening trend makes the anti-trade talk from the major presidential candidates a greater concern. Global trade represents a substantial chunk of the U.S. economy and, on the whole, American companies and American consumers have greatly benefited from globalization in recent decades. Candidates’ promises that existing trade deals will be renegotiated or that tariffs will be imposed make for good populist sound bites, but history clearly shows that no one wins in a trade war.


Slowing growth may also have a bearing on the Fed’s course of action on interest rates. The market is pricing in a 0.25% increase for December, but in light of the subpar economic data of late, we don’t think it’s a lock that there will be a hike before 2017.





As always, we encourage investors to speak with one of our financial advisors, who can help determine which investment vehicles are best suited for you based upon your individual goals, objectives, risk tolerance and time horizon.


Investing in securities products involves risk, including possible loss of principal.


This material is provided for informational purposes only by USAA Asset Management Company (AMCO) and/or USAA Investment Management Company (IMCO), both registered investment advisors. The material is not investment advice and is not a recommendation, an offer, or a solicitation of an offer, to buy or sell any security, strategy or investment product. The views and opinions expressed in the material solely reflect the judgment of the authors, but not necessarily those of AMCO, IMCO or any affiliates as of the date provided and are subject to change at any time. All information and data presented herein has been obtained from sources believed to be reliable and is believed to be accurate as of the time presented, but AMCO/IMCO does not guarantee its accuracy. The information presented should not be regarded as a complete analysis of the subjects discussed. Any past results provided do not predict or indicate future performance, which may be negative. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission of AMCO/IMCO and USAA.


Diversification is a technique to help reduce risk. There is no absolute guarantee that diversification will protect against a loss of income.


The fixed income securities are subject to price volatility and a number of risks, including interest rate risk. Interest rates and bond prices move in opposite directions so that as interest rates rise, bond prices usually fall and vice versa. Interest rates are currently at historically low levels. Fixed income securities also carry other risks, such as inflation risk, liquidity risk, call risk, and credit and default risks. Lower-quality fixed income securities involve greater risk of default or price changes. Securities of non-U.S. issuers generally involve greater risks than U.S. investments and can decline significantly in response to adverse issuer, political, regulatory, market and economic risks. Fixed income securities sold or redeemed prior to maturity may be subject to loss.


Investments in foreign securities are subject to additional and more diverse risks, including but not limited to currency fluctuations, market illiquidity, and political and economic instability. Foreign investing may result in more rapid and extreme changes in value than investments made exclusively in the securities of U.S. companies. There may be less publicly available information relating to foreign companies than those in the U.S. Foreign securities may also be subject to foreign taxes. Investments made in emerging market countries may be particularly volatile. Economies of emerging market countries are generally less diverse and mature than more developed countries and may have less stable political systems.


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Investments provided by USAA Investment Management Company and USAA Financial Advisors Inc., both registered broker dealers, and affiliates.


Financial planning services and financial advice provided by USAA Financial Planning Services Insurance Agency, Inc. (known as USAA Financial Insurance Agency in California, License # 0E36312), a registered investment advisor and insurance agency and its wholly owned subsidiary, USAA Financial Advisors, Inc., a registered broker dealer.




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