U.S. Market Momentum Fades as Global Growth Worries Re-emerge
North American markets began the week on a positive note, buoyed by a resurgent tech sector and better-than-expected earnings reports. By Tuesday’s close, the Dow had climbed nearly 350 points, while the Nasdaq added almost 140 points. Canada’s main stock index rose 196 points over the two-day period as gains in health care and financials, along with upbeat earnings, helped set a positive initial tone for the week.
By Wednesday’s open, the focus had shifted to the Nasdaq, which looked to be on the verge of exiting a bear market. The tech-heavy index had rebounded nearly 20% from its Christmas Eve low, underscoring the strength of the tech sector, which has lifted markets higher. Recent gains have been powered by rising optimism about U.S.-China trade negotiations and the Fed’s recent assurances that near-term rate hikes were less likely, as inflation concerns had receded.
Overall optimism waned later Wednesday as concerns continue to grow over a flagging global economy, Europe in particular. The region’s services sector has shown particular weakness, with indicators hitting a 49-month low in January. France posted its fastest decline in almost five years, Italy continues to struggle and the U.K. posted its weakest service-sector growth in over two years. This in addition to the EU’s downbeat forecast for GDP growth, recently cut to 1.3%, down from 1.9% in November.
U.S. markets closed slightly down on Wednesday, snapping a five-day rally for the S&P, and continued their decline Thursday as U.S.-China trade tensions and a bleaker outlook from the Bank of England renewed fears of a slowdown in global growth.
Meanwhile, the loonie – after a particularly strong start to 2019 – hit a one-week low against the U.S. dollar on Thursday, as the Bank of Canada warned of the negative economic impact caused by deteriorating global trade.
Dow, Nasdaq Hold On to Early Gains
For the four days covered in this report, the Dow added 106 points to close at 25,170, the S&P 500 dropped 1 point to settle at 2,706, while the tech-heavy Nasdaq climbed 24 points to close at 7,288. In Canada, the TSX climbed 197 points to end at 15,703.
Q4/2018 earnings show signs of slowing growth. U.S. earnings season is in full swing, with ~66% of S&P500 Index constituents having reported financial results. On an index basis, revenues and earnings have grown 7% and 14% YOY, respectively. ~71% of earnings results have exceeded consensus estimates. Results have been strong across sectors excluding materials, and the sectors leading the earnings growth trend include energy (+99% YOY), communication services (+20%), and industrials (+19%).
Despite mostly positive results, a growing number of companies have cited mounting headwinds that are eroding margins, including foreign exchange pressures, supply chain constraints and rising input costs. We expect global trade tensions and cost-push inflation will lead producers to pass on higher costs to end consumers in an effort to sustain profit margins. In 2019, we expect earnings growth to decelerate as consumers struggle to absorb additional price increases and corporations feel the effects of higher financing costs. We continue to believe that high-quality issuers that generate substantial free cash flow and have sustainable competitive advantages, clean balance sheets and exposure to secular growth themes offer the best potential risk-adjusted returns.
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