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Newsletter November 2016

EQUITY OVERVIEW - STRONG DOLLAR, INTEREST RATE EXPECTATIONS IMPACT EARNINGS OUTLOOK

A strong dollar eroded some corporate earnings as U.S. companies with offshore revenue found it tougher to generate profitable sales. The U.S. dollar has been moving higher against most developed and emerging currencies in anticipation of a rate rise before year-end.

The energy sector, which currently represents 7.3% of the S&P 500 Index, has been a significant distracter of earnings for equities. With continued low oil prices, earnings for energy companies have also fallen, making earnings for the S&P 500 look dismal. Optimistically, when stripping out energy sector earnings, the rest of the S&P 500 sectors are roughly unchanged.

U.S. banks reported stronger than anticipated quarterly earnings as trading helped banks stay profitable. Recent contentions surrounding banking practices might lead to reformed legislation for banks, disallowing them of some activities that have added to their profitability.

More equity analysts are not just looking at company earnings to determine stock valuations, but are also eyeing interest rate levels and how much cash is being returned to shareholders.

Recent divergent stock sector performance is being caused by the anticipation of rising rates, earnings, and mergers. Assets moving from one sector to another (known as sector rotation) is also being induced by the coming rate rise and earnings expectations. 

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Sources: S&P, Bloomberg