Record inflows into equities, are we closer to euphoria?

Wall Street continues to live the dream as US equity markets closed the week at new record highs, the earnings season appears to be delivering the reassurance investors require. According to Factset research, just about one-quarter of the S&P 500 companies have reported earnings, of that 76 % have reported positive earnings surprises and 81% beaten at the top line. Blended earnings growth is currently 12%, ahead of the 11% forecast. Along with the continued strength in the equity market, sterling has been the other story to make headlines. The pound managed to trade above $1.43, helped in part by continued weakness in the US dollar but also in hope that the UK economy is fairing better than economists had forecast. This view was reinforced on Friday as GDP growth for the previous quarter came in at 0.5%, 0.1% ahead of expectations. Conversely, growth in the world’s largest economy came in year on year at 2.6%, this was modestly below analyst forecasts.

The Vix index spent a large part of last year at record lows, although equity prices continue to climb the Vix index has traded higher this year, closing this week little changed at 11. Yields on US treasuries continue to creep higher, the yield on the 10-year closing the week at 2.66%. If we want signs that we are possibly closer to a point of investor euphoria, according to Merrill Lynch investors put over 30bn dollars into equity funds in the past week, a record. Also, according to Merrill Lynch, their “Bull Bear” indicator is giving its highest sell signal since March 2013.  Although it must be pointed out these indicators are fallible.

Looking to the week ahead earnings will remain in focus, with Amazon, Facebook and Alphabet all reporting in the coming week. Expectations will be raised for these companies after Netflix beat in the past week. After Donald Trump’s pantomime villain appearance in Davos last week, this coming week he gives his state of the union address. With Trump’s approval ratings still below 50%, he will use this speech to provide some vision for the year ahead. He will also want to look back over the past 12 months, point to the strength of the US economy and the successful tax cuts. Trade came up in Davos and he will probably touch upon this topic as well. It’s a busy week for US economic data, inflation in the form of Personal consumption expenditure, personal income and expenditure, employment wages and the first interest rate decision of the year from the Fed on Wednesday evening. On Friday we get the January average earnings and unemployment rate. A pick up in average earnings economists believe is the lead indicators of inflationary pressures to start to build.  

Posted on January 28, 2018 .