Rising Corporate Earnings Have Market Bulls Feeling Vindicated

  • Treasuries breach 2.4%, Caterpillar earnings lift equities
  • Solid European manufacturing data support risk-on sentiment

Allianz's Dwane Says Equity Markets Need Earnings to Rise

Market bulls could be forgiven for saying, “We told you so."

The Dow Jones Industrial Average surged to a fresh record, the dollar hit the highest in three months and Treasuries tumbled as blue chips from Caterpillar Inc. to 3M Co. and McDonald’s Corp. reported quarterly results that topped estimates. 

Bulls have spent most of the second-longest equity rally in U.S. history on the defensive, never more so than during the last six months as markets surged in the face of geopolitical turmoil, dysfunction in Washington and natural disasters. Throughout it all, they’ve pointed to a simple reason for optimism -- economic growth is accelerating around the world and earnings will support higher asset valuations.

For a day at least, they’ve been vindicated.

“You have two very important factors -- better-than-expected earnings from companies like Caterpillar, viewed as a proxy for domestic and global growth, and you have economic data that support growth outlook,” said Bruce Bittles, Robert W. Baird & Co. chief investment strategist. “These factors are pretty good tailwinds to the markets, and they send a clear risk-on message.”

Caterpillar surged the most in six months after beating earnings estimates and raising its own forecasts amid a jump in Chinese construction, while 3M rallied the most in three years after boosting its outlook for profit. McDonald’s had better-than-forecast sales, while General Motors’ profit blew away expectations. The news continued a strong third quarter in which 80 percent of the S&P 500 Index components that have reported profit topped estimates.  

U.S. corporate earnings are on track to rise for a fifth straight quarter, while the economy is predicted to have grown by 2.5 percent in the prior three months. The S&P 500 has had 49 record highs this year, while the greenback widened its rally from a September low to 2.8 percent and 10-year yields punched through the psychologically important 2.40 percent level.

“It’s optimism in the economy,” said Timothy High, U.S. strategist at BNP Paribas SA. “People are certainly starting to price in more of a chance of tax reform. All these things are adding up to a shift toward the higher end of the yield range.”

Even the FANG group of large-cap technology stocks joined the rally. Facebook, Amazon, Netflix and Google had lost 3.4 percent in the prior five days as investors grew concerned that tech earnings may miss the mark, exposing investors who’ve pushed the cohort to market-beating gains so far in 2017.

Tuesday’s batch of strong earnings alleviated some of that concern. It also came hours after data in Europe showed that job creation in manufacturing rose to the highest level since 1997, adding to evidence that the global economy is undergoing harmonized growth.

“We’ve been looking to Europe for signs of a pick-up in growth, and the manufacturing data in Europe show that,” said Michael Antonelli, managing director of institutional equity trading at Robert W Baird. “Stronger growth in Europe supports a U.S. growth outlook.”

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