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Markets Focus on Higher Expected Profits as Fear Retreats

Feb 21, 2018

Investors have become increasingly concerned as the stock markets’ prolonged period of growth has been punctuated by bouts of extreme volatility. Surging corporate profits, however, should help to soothe investors who are considering limiting their exposure after recent market turbulence. This is the thesis posited by Thomas Black in his Bloomberg article “As Stock Jitters Recede, Focus Shifts to Surging Company Profit” A combination to recent corporate tax cuts, along with higher consumer spending, has seen numerous firms post better than expected earnings. The forecast for earnings growth for the S&P 500 is expected to exceed an astonishing 20% in 2018. Economic growth overall is projected to rise to 2.7%, compared to 2.3% last year. All signs seem to be pointing up, but are there concerns beneath the surface?

These positive developments may be contributing to a potential pull-back in the equity markets. With increased capital to spend from rising wages, more of the population in the labor force, and a lower tax cost, rising inflation may be a serious issue. The Fed is currently scheduled to raise rates three times in 2018, but it is possible that this combination of factors will push inflation to the point where further action needs to be taken. As most investors know, rising interest rates have a negative correlation to equities, so any increase would be detrimental to investors. This is a situation for investors to closely monitor.

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