We just finished the busiest week of 1st quarter earnings season, and although many companies shared positive results, stock indexes experienced modest declines.[1] The S&P 500 lost 0.01%, the Dow dropped 0.62%, and the NASDAQ gave back 0.37%.[2] International stocks in the MSCI EAFE decreased by 0.39%.[3]
Last week provided a variety of information for investors to take in. On Friday, we received the initial reading of 1st-quarter Gross Domestic Product (GDP). The data came in more positive than analysts expected, with the economy experiencing 2.3% growth.[4] The latest employment readings also showed costs for benefits and pay rising at the fastest pace in a decade.[5] On the geopolitical front, the leaders of North and South Korea met for historic talks that could result in denuclearizing the Korean peninsula.[6]
As we continue to watch these developments, we want to explore what’s behind our current corporate earnings season.
A Deeper Analysis of Corporate Earnings
So far, this earnings season is the best on record.[7] Of the S&P 500 companies with published data, 79.4% of them beat expectations.[8] The outperformance is significant, too. On average, companies are 7.95% higher than projected.[9]
Despite these positive results, stock prices did not rise in reaction. Companies that beat expectations have only experienced an average of a 0.3% equity increase in the first day after their report.[10] The disconnect between high earnings and low stock increases may be surprising. But when you look closer, lingering questions about corporate health are weighing on many investors’ minds:
- Will higher costs—including wages and materials—decrease their profits moving forward?
- Could increasing treasury yields raise the cost of their debt?
- Will they continue to benefit from the new U.S. tax law, or is this earnings season an anomaly?[11]
No one can say for sure what is on the horizon for corporate performance. On one hand, concerns about growing costs and inflation could erode investor confidence and hamper the markets’ ability to regain previous highs.[12] On the other, consumer sentiment remains high—and experts predict that each year until at least 2020, S&P 500 companies will have double-digit growth.[13]
Looking ahead, we will monitor many different details to gain more insight into what the future may hold, including bond yields, wage costs, and inflation. For now, please contact us anytime if you have questions about current market conditions or your plans for the future.
ECONOMIC CALENDAR
Monday: Pending Home Sales Index
Tuesday: PMI Manufacturing Index, ISM Mfg Index, Construction Spending
Wednesday: ADP Employment Report
Thursday: Jobless Claims, Factory Orders, PMI Services Index, ISM Non-Mfg Index
Friday: Employment Situation
| DATA AS OF 4/27/2018 | 1 WEEK | SINCE 1/1/18 | 1 YEAR | 5 YEAR | 10 YEAR |
| STANDARD & POOR’S 500 | -0.01% | -0.14% | 11.77% | 11.03% | 6.69% |
| DOW | -0.62% | -1.65% | 15.87% | 10.57% | 6.55% |
| NASDAQ | -0.37% | 3.13% | 17.70% | 16.77% | 11.38% |
| INTERNATIONAL | -0.39% | -0.39% | 11.27% | 3.38% | -0.44% |
| DATA AS OF 4/27/2018 | 1 MONTH | 6 MONTHS | 1 YEAR | 5 YEAR | 10 YEAR |
| TREASURY YIELDS (CMT) | 1.62% | 2.02% | 2.24% | 2.80% | 2.96% |
Notes: All index returns (except S&P 500) exclude reinvested dividends, and the 5-year and 10-year returns are annualized. The total returns for the S&P 500 assume reinvestment of dividends on the last day of the month. This may account for differences between the index returns published on Morningstar.com and the index returns published elsewhere. International performance is represented by the MSCI EAFE Index. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly.
You Have the Right to Challenge the IRS
The Internal Revenue Service, part of the U.S. Department of Treasury, has nearly 80,000 employees and an $11.4 billion budget. Nevertheless, the IRS grants taxpayers certain inalienable rights; one of those is the right to challenge the agency and to be heard.
Taxpayers have the right to:
- Raise objections to agency rulings.
- Introduce additional documentation in response to IRS decisions.
- Expect the agency to consider their objections timely.
- Expect to receive a response if the agency disagrees with the taxpayer’s position.
The IRS sometimes notifies taxpayers that their returns have mathematical or clerical errors. Here are taxpayers’ rights in those cases:
- Taxpayers have 60 days to inform the IRS they disagree.
- They should provide copies of records to help correct the errors.
- They may call the number on the notice for help.
- They can expect the agency to make necessary adjustments and send corrections if the IRS upholds the taxpayer’s position.
If the agency doesn’t agree with the taxpayer’s position, here is what happens next:
- The IRS will send a tax-adjustment notice by mail.
- The taxpayer has the right to challenge the adjustment by filing a challenge in S. Tax Court. The petition must be filed within 90 days of the IRS notice.
Understanding your rights as a taxpayer makes tax filing easier, more equitable, and less stressful.
* This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
Tip adapted from IRS.gov[14]
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Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.
Diversification does not guarantee profit nor is it guaranteed to protect assets.
International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors.
The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.
The Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the NASDAQ. The DJIA was invented by Charles Dow back in 1896.
The Nasdaq Composite is an index of the common stocks and similar securities listed on the NASDAQ stock market and is considered a broad indicator of the performance of stocks of technology companies and growth companies.
The MSCI EAFE Index was created by Morgan Stanley Capital International (MSCI) that serves as a benchmark of the performance in major international equity markets as represented by 21 major MSCI indices from Europe, Australia, and Southeast Asia.
The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.
Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.
Past performance does not guarantee future results.
You cannot invest directly in an index.
Consult your financial professional before making any investment decision.
Fixed income investments are subject to various risks including changes in interest rates, credit quality, inflation risk, market valuations, prepayments, corporate events, tax ramifications and other factors.
These are the views of Platinum Advisor Strategies, LLC, and not necessarily those of the named representative,
Broker dealer or Investment Advisor, and should not be construed as investment advice. Neither the named representative nor the named Broker dealer or Investment Advisor gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your financial advisor for further information.
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[1] https://www.reuters.com/article/us-usa-stocks-weekahead/rising-costs-inflation-on-radar-as-u-s-earnings-season-unfolds-idUSKBN1HY2Q8
[2] http://performance.morningstar.com/Performance/index-c/performance-return.action?t=SPX®ion=usa&culture=en-US
http://performance.morningstar.com/Performance/index-c/performance-return.action?t=%21DJI®ion=usa&culture=en-US
http://performance.morningstar.com/Performance/index-c/performance-return.action?t=@CCO
[3] https://www.msci.com/end-of-day-data-search
[4] http://wsj-us.econoday.com/byshoweventfull.asp?fid=485678&cust=wsj-us&year=2018&lid=0&prev=/byweek.asp#top
[5] https://www.marketwatch.com/story/worker-compensation-rising-at-fastest-pace-since-2008-eci-finds-2018-04-27
[6] https://www.cnbc.com/2018/04/27/us-stock-futures-dow-data-earnings-and-politics-on-the-agenda.html
[7] https://www.bloomberg.com/news/articles/2018-04-27/fang-stocks-save-week-with-growth-angst-lurking-at-3-rates
[8] https://www.cnbc.com/2018/04/27/us-stock-futures-dow-data-earnings-and-politics-on-the-agenda.html
[9] https://www.bloomberg.com/news/articles/2018-04-27/companies-are-beating-earnings-predictions-at-fastest-rate-ever
[10] https://www.bloomberg.com/news/articles/2018-04-27/fang-stocks-save-week-with-growth-angst-lurking-at-3-rates
[11] https://www.reuters.com/article/us-usa-stocks-weekahead/rising-costs-inflation-on-radar-as-u-s-earnings-season-unfolds-idUSKBN1HY2Q8
[12] https://www.reuters.com/article/us-usa-stocks-weekahead/rising-costs-inflation-on-radar-as-u-s-earnings-season-unfolds-idUSKBN1HY2Q8
[13] https://www.marketwatch.com/story/consumer-sentiment-report-shows-taxes-tariffs-pulling-in-opposite-directions-2018-04-27
https://www.bloomberg.com/news/articles/2018-04-27/fang-stocks-save-week-with-growth-angst-lurking-at-3-rates
[14] https://www.irs.gov/newsroom/the-right-to-challenge-the-irss-position-and-be-heard-taxpayer-bill-of-rights-4
