Second quarter earnings reports continued to come in this week with 30% of S&P 500 companies reporting. Things are looking better than expected. Earnings growth for the period has been less negative than expected. Not positive, just less negative. The reports show earnings contraction of 0.1%. This is 5.1% better than expected. Growth in earnings has been led by the Information Technology sector. Talks about increased regulation for some of the large tech companies seem to have somewhat affected their market prices, but not earnings as much. Sales growth has been positive, coming in at 3.3% with a surprise factor of 0.9%. Growth in sales has again been led by the Information Technology sector.

It looks like some of the expected slowdown is being pushed into next quarter. The earnings announcement has come in with some negative revisions. Now, growth for the third quarter is expected to be down 0.2%. This is compared to the July 1 expectation that earnings would grow by 0.8% in the coming quarter. We have seen downward revisions for the third quarter from the beginning of the year to now. Growth is expected to improve to mid-single digits in the fourth quarter.

The Conference Board Leading Economic Index, an index that tracks 10 components that are expected to anticipate direction of growth in a business cycle, recorded a reading of -0.3% in June. This is the first decline since December of last year, and the largest drop in three years.  Weakness in new manufacturing orders, housing permits and unemployment insurance claims were the major detractors.

June home numbers show some weakness in housing. Not as many new homes were sold as expected. The expectation was for 657,000 homes to be sold in the month. The number came in 11,000 houses fewer than expected at 646,000. Existing home sales were also down. They came in at 5.27 million. Lower than the expected 5.35 million. We did see a pick-up in building permit issuance. 1.23 million permits were issued, compared with the expected 1.22 million.

Consumers are still optimistic on the economy. The Michigan Sentiment indicator is still pretty high at 98.4, which is slightly better than the previous month’s 98.2.

Contributed by | Kuuku Saah, CFA, Investment Analyst

Kuuku is an Investment Analyst with seven years experience in the Wealth Management division of Bankers Trust, most recently on the Trading Desk as a Securities/Trading Specialist. Kuuku’s primary responsibilities include supporting our portfolio managers in security and portfolio analysis. Kuuku attended Drake University and double-majored in finance and economics. During that time he interned with BTC Capital Management.

Source: BTC Capital Management, Bloomberg LP, Ibbotson Associates.
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