INSIGHTS

On July 12, 2016

AAM Viewpoints - Resiliency on Display in the First Half of 2016 – Will the Second Half Bring Growth?

Over the first half of 2016 the S&P 500 Index added 2.7% on a price basis, closing the second quarter just 1.5% below its record high set back in May 2015; a victory given the volatility along the way. Recall the S&P 500 fell over 10% in the first two weeks of 2016 in what was the worst start to a year in the 88-year history of the index. A Chinese bear market and free-falling oil prices stoked global recession fears that caused the second +10% correction in equities in a four-month period. More recently the United Kingdom’s decision to exit the European Union spurred the S&P 500 to selloff 5.4% over the course of two days.

These are not minor events. The Chinese economy is the second largest in the world and makes up the second largest country-level revenue exposure in the S&P 500 behind only the United States. The United Kingdom economy is the fifth largest in the world and makes up the third largest country-level revenue exposure in the S&P 500 behind the United States and China. When the economies of the second and third largest contributors to revenues in an index come under direct pressure, one would expect a significant impact – or perhaps a long road to recoup any losses. Not this market. Here we are in the first full week of July 2016 with the S&P 500 in the 2080s. Similar to where we were a year ago during the first week of July 2015 when the S&P 500 was in the 2080s. Taking it one step further – the S&P 500 on December 30, 2014? You guessed it…2080. What is becoming clear, in our opinion, is global monetary policy will provide the crutches until the patient can walk on its own. Whether it be the Fed, the People’s Bank of China, the Bank of England, the European Central Bank, or the Bank of Japan – policies from around the globe have helped equity markets stay afloat in light of major events and snap back from selloffs almost as fast as they went down.

Look for central banks to remain accommodative, rates to remain low, and the market to grind along until provided with a catalyst that we believe will ultimately be a return to corporate profitability growth. Second quarter earnings season unofficially kicked off on Monday after the close when Alcoa reported. Aggregate analyst estimates are calling for another quarter of year-over-year earnings declines for the S&P 500 which will mark five consecutive quarters. However, as of now, analysts expect this streak to come to an end during the second half of the year with estimated EPS (Earnings Per Share) growth of 4.2% for the index over the third and fourth quarter. Equally encouraging is that the earnings growth estimates appear to be driven by the top-line. In terms of revenues, the estimated growth rate for the S&P 500 for Q3 (3^rd quarter) 2016 and Q4 (4^th quarter) 2016 are currently 2.2% and 5.1%. While we fully expect these estimates to be dialed down over the course of the next six months (the five-year average revision is -5%), the take-away is that for the first-time in a long-time bottom-up analysts can see growth on the horizon. That might be the difference between a resilient market and a market that is able to move on to higher levels.

CRN: 2016-0705-5448 R

This commentary is for informational purposes only. All investments are subject to risk and past performance is no guarantee of future results. Please see the Disclosures webpage for additional risk information. For additional commentary or financial resources, please visit www.aamlive.com.