Election Draws Near

SPX continues to push new highs

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A storm is brewing as semiconductor earnings become murky, presidential election odds are swinging wildly, and the Chinese market rebound fizzles out. And yet amidst all this noise, our sector picks and overall portfolio are outperforming the SPX. In the premium section we look at how positioning has changed over the past few months.

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Today’s topics: Macro, corporate earnings, Trump trade, positioning, technicals.

Macro update

Macro data this week provided more positive signals on the economy. Retail sales came in stronger than expected, showing that consumer spending remains healthy. This was true for nearly all categories. In fact, retail sales rose faster than last week’s inflation print, indicating there is real (volume) growth in consumption rather than just higher prices.

Retail sales is strong

Looking at the broader economic picture, the Q3 real GDP estimate has been revised up to 3.4% growth. This solid pace of expansion should continue to support healthy corporate revenue growth. So far, reported earnings have been largely in line with this GDP growth, providing some reassurance that the economy is not dramatically weakening.

As we have been writing for a while, the latest data suggest the economy is holding up well. Consumers are holding up, and the overall growth backdrop remains supportive for corporates. With higher growth comes higher interest rates, but the 10-year yield is hovering around 4.1% and not threatening equity multiples for now.

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Corporate earnings

As we step back and assess the earnings landscape, the bigger picture remains encouraging. It's still early in Q3 earnings season, but so far, the results have been solid. Revenue growth is tracking at a robust 5%, consistent with the growth we've seen in each of the past five quarters.

What's particularly noteworthy is that revenue growth has held steady despite the decline in core inflation to 3%. Removing the impact of inflation, real revenue growth has been accelerating for several quarters in a row, now sitting at a healthy 2% (5% revenue growth minus 3% core inflation). This suggests that volume growth is strong.

It is interesting that United Airlines (UAL) put up a banner quarter of earnings and was up 12% in one day. You don’t normally see airline stocks do well at this point of the cycle, but the company is benefiting from a recovery in business travel and international flight growth. Travel demand is robust with airports seeing record-high traffic, according to TSA data. Leisure traffic has been supplemented by a pickup in business travel. Clearly, the economy is still running full steam.

Trump odds rising…

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