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Market Commentary Nov. 27.jpg



By Brian Herscovici, CFA

Chief Investment Officer, USAA Managed Portfolios









  • The all-important holiday shopping season starts this week with consumer confidence running high. The economy is in good shape, with low unemployment, larger paychecks and inflation well under control.
  • Third-quarter earnings season is nearly over and the results have been strong. Year-over-year earnings for 3Q are up more than 25 percent, the best showing for any quarter since 2010. All 11 S&P 500 sectors reported positive earnings surprises.
  • Investors remain hard to impress. Companies that beat analyst consensus and affirmed forward guidance saw modest share-price gains, while those that hinted at tougher market conditions ahead were severely punished.

The ever-earlier holiday shopping season kicks off this week, and at this point, it looks like consumers are in a good position. Consumer confidence dipped a bit in October, but it remains close to an all-time high. The buoyancy makes sense – the U.S. economy is growing at a decent clip, jobs are plentiful, wages are rising and inflation is tame.


With seasonal expectations so high, large retailers find themselves in a potentially vulnerable spot. If they beat their forecast, they may enjoy a small bump in their share price. But if they modestly miss their number, or they give even the slightest hint that less rosy times may lie ahead, they stand to be clobbered.


That has been the trend for Standard & Poor’s 500 earnings reports, which are nearly all wrapped up for the third quarter.


More than three-fourths of the S&P 500 has reported 3Q profit levels that surpassed analyst expectations, according to the financial data firm FactSet. Only one quarter in the past decade has come in better. And companies have been beating their forecasts by one of the widest margins in years, FactSet says. Year-over-year earnings growth for 3Q is the best for any quarter since late 2010.


Even better, the entire index is sharing in the bounty – all 11 sectors are reporting positive earnings surprises for 3Q, while only utilities and consumer staples have failed to generate positive revenue surprises for the quarter as well.


At the top of the sector standings is technology – more than 90 percent of tech firms in the S&P 500 have exceeded 3Q expectations, and the sector has one of the widest positive spreads between earnings estimates and actual results.


But along with delivering this good news, a number of the biggest and best-known tech players told investors that the next quarter or two may fall a bit short of initial forecasts. The sector has paid a heavy price for its transparency – tech’s year-to-date performance has plummeted more than 12 percentage points since early October. The consumer discretionary sector, which includes the most prominent online retailers, has experienced a similar slide.


For tech, one could argue that it was overdue for a correction following a 400+ percent gain over the past decade that has driven up valuations to lofty levels. But corrections typically need a trigger, and for tech, that trigger has been slowing global economic growth and a strengthening U.S. dollar.


Energy was one of the best 3Q performers in terms of earnings and revenue surprises, with much of its success accruing to oil prices rising to their highest in several years. But after peaking in early October, crude endured an unprecedented collapse – prices fell close to 30 percent in little more than a month on worries of oversupply amid a global GDP slowdown.


Financials, which have significantly underperformed the S&P since May, are dealing with a flattened yield curve that has sapped much of the benefit of higher interest rates. The sector also faces concerns about future loan growth and higher credit losses as we get later into the current economic cycle.


It’s no shock that, given the market-muddling uncertainties, volatility has spiked in the fourth quarter after being docile since last spring. Investors should expect that to continue.


And while we are somewhat cautious about U.S. stocks based on valuations, we have seen no persuasive signs of an imminent end for the bull market that began in early 2009. A few key reasons: The consumer-led U.S. economy is holding up better than others, interest rates are still historically low, and earnings growth is projected to continue through next year.

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