Earnings Lead the Way

Monday, April 23, 2018 - In a year of resurgent volatility, heightening geopolitical risks, tightening monetary policy, rising inflation concerns, and a flattening yield curve, markets received a welcomed reprieve this week as attention was directed to some positive countervailing developments. A string of upbeat earnings announcements, positive economic data, and the continued rally in oil prices propelled the major stock indexes for slight gains on the week.

18% of the S&P 500 constituents have reported Q1 earnings thus far and 80% of them have reported EPS results that exceeded consensus estimates. Investors were also encouraged by retail sales in March, that broke three months of declines, a rise in housing starts, and an uptick in manufacturing activity. A steepening of the yield curve towards the end of the week lent further encouragement to investors who have been increasingly concerned with this year's flattening trend. Crude oil is now trading at its highest level in more than three years, spurred by output cuts by OPEC, production constraints posed by African and Middle East geopolitical conflicts and a strong global economy that is fueling steady demand. These benign developments helped shift attention away from recent geopolitical and monetary policy concerns and advance the major indexes to a week of gains. The DJIA, S&P 500, and NASDAQ edged up 0.4%, 0.5%, and 0.6% each for the week.

ETFG Equity Exposure Report - Amid earnings season, our equity exposure report is a popular tool used to help gain insights into how ETFs will be affected by the earnings announcements of their underlying constituents. Financials have been among the standouts of the Q1 2018 earnings season due to a supportive environment of tax cuts, regulatory relief, renewed volatility, and a healthy global economy. Climbing treasury yields and widening net interest margins gave an additional boost to the financial sector, sending it up 1.6% this week. Sector stalwarts Bank of America, Morgan Stanley and Goldman Sachs all reported positive earnings surprises and were just a few of the notable financial companies to report earnings so far. A look at our exposure report shows that the ETFs with the largest exposures to these companies on a percentage basis are the iShares U.S. Financial Services ETF (IYG) and the iShares U.S. Broker-Dealers & Securities Exchanges ETF (IAI) with 9.26%, 9.27%, and 9.99% weightings. IYG and IAI were up 1.1% and 1.5% respectively for the week.

Conversely, several companies in the consumer goods and consumer staples companies suffered this week due to depressing margins triggered by increased competition, reduced pricing power, shifting consumer preferences, and flagging demand. Companies such as Procter & Gamble and Philip Morris were among the most notable laggards this week. P&G and Philip Morris each have their largest weightings in the Consumer Staples Select Sector SPDR Fund (XLP) at 11.21% and 7.89% each. Combined, these two companies account for nearly 20% of XLP. This outsized weighting and their disappointing earnings results helped sink XLP down 4.3% this week, serving as a stark reminder for investors that a full look through of an ETF's holdings is critical to understanding its true risk and reward profile.

Earnings performance will continue to command investor attention with nearly a third of the S&P 500 set to report in the week ahead. We encourage you to use our equity exposure report to monitor your exposures and navigate potential positive or adverse developments from company earnings results.

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