Market Perspective Global Earnings Remain Supportive November 8, 2017 Keith Lerner, CFA, CMT Managing Director, Chief Market Strategist 2017 SunTrust Banks, Inc. SunTrust is a federally registered service mark of SunTrust Banks, Inc.
Positive Earnings Continue to Drive Stocks Coming into 2017, we advised equity investors to lean bullish, even though we recognized the range of potential outcomes was wide due to policy uncertainty. the past month, which is the best level in the past three years. Moving forward, a more competitive US dollar, coupled with the An improved earnings outlook, especially with absolute equity valuations above their historical averages, has been a key pillar of our positive market view. The good news is we continue to see a broad-based earnings recovery. Indeed, 38 of the 46 countries we track, or 83%, are showing rising profit estimates for the next 12 months. This is important since earnings and stock prices are highly correlated. In the US, after back-to-back periods of double-digit earnings growth, the third quarter is on pace for a 6% profit increase. This is a downshift from the snapback in earnings of the previous quarters. Still, underlying trends remain positive: for the third consecutive quarter more than 60% of companies are exceeding sales expectations, which last occurred in 2011. Further, more than half of the S&P 500 companies had their earnings estimates raised by analysts over potential for lower corporate tax rates and a solid global economy, should be supportive of profits. Bottom Line: While there has been much attention focused on the political landscape both in the US and abroad, we believe the more important story for the stock market has been the powerful rebound in global profits. At this point, recession risks remain low, and we expect earnings to continue to rise. Accordingly, we continue to lean bullish. Although geopolitical uncertainties are likely to weigh on the market at times, as long as profits are improving, we advise that investors should stay with the positive market trend. From a positioning standpoint, we view the US as the big blue chip country due to its stability, yet have also become more positive on international markets given the inflection point in profits. From a sector standpoint, cyclicals such as technology, financials, materials and industrials continue to have strong earnings results and should benefit from an ongoing economic recovery. Health care continues to be a standout among the defensive sectors and should be supported by cheap valuations and secular tailwinds.
Record Earnings Supporting World Markets Global earnings are at a cycle high, which have been the primary driver of positive stock returns this year. 550 500 450 400 350 300 250 MSCI ACWI Index Level Global Equities vs. Earnings Forward Earnings Estimate $37 $35 $33 $31 $29 $27 200 '10 '11 '12 '13 '14 '15 '16 '17 $25 Data Source: FactSet, MSCI, SunTrust IAG 3
Broad-Based Global Earnings Rebound The earnings rebound is a global story: 38 of the 46 countries we track, or 83%, have seen their forward earnings estimates rise over the past three months. 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% Global Markets: % of Countries With Rising 3-Month Earnings Trends 0% 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Data Source: MSCI, FactSet, SunTrust IAG Includes 46 countries within the MSCI All Country World Index where data is available; using earnings estimates where available. MSCI All Country World Index (ACWI) which captures large- and mid-cap representation across 23 Developed Markets (DM) and 23 Emerging Markets (EM) countries. The index covers approximately 85% of the global investable equity opportunity set.
S&P 500 Forward Earnings Estimate US Earnings Validate New Market Highs One of the main reasons US stocks traded sideways from late 2014 to the summer of 2016 was because earnings languished. However, profits turned positive for the first time in five quarters in the fall of 2016, and the market followed suit. 2800 2300 S&P 500 Index Level S&P 500 and Earnings Earnings are highly correlated with stock market returns $160 $150 $140 Importantly, earnings estimates for the next 12 months are at a record high, and suggest stocks are being supported by solid fundamentals. 1800 $130 $120 1300 Forward Earnings Estimate $110 800 '12 '13 '14 '15 '16 '17 $100 Data Source: FactSet; SunTrust IAG The S&P 500 is an unmanaged index comprised of 500 widely held securities considered to be representative of the stock market in general. An investment cannot be directly made into an index. Past performance does not guarantee future results.
1Q-11 2Q-11 3Q-11 4Q-11 1Q-12 2Q-12 3Q-12 4Q-12 1Q-13 2Q-13 3Q-13 4Q-13 1Q-14 2Q-14 3Q-14 4Q-14 1Q-15 2Q-15 3Q-15 4Q-15 1Q-16 2Q-16 3Q-16 4Q-16 1Q-17 2Q-17 3Q-17 US Earnings Growth Moderating but Positive After back-to-back quarters of double-digit earnings growth, the third quarter is on pace for a 6% profit increase. Moving forward, a more competitive dollar coupled with the potential for lower corporate tax rates and a solid global economy should remain supportive of profits. 25% 20% 15% 10% 5% S&P 500: Quarterly Earnings Growth (%) 6% 0% -5% -10% Data Source: FactSet, SunTrust IAG The S&P 500 is an unmanaged index comprised of 500 widely held securities considered to be representative of the stock market in general. An investment cannot be directly made into an index.
1Q-03 3Q-03 1Q-04 3Q-04 1Q-05 3Q-05 1Q-06 3Q-06 1Q-07 3Q-07 1Q-08 3Q-08 1Q-09 3Q-09 1Q-10 3Q-10 1Q-11 3Q-11 1Q-12 3Q-12 1Q-13 3Q-13 1Q-14 3Q-14 1Q-15 3Q-15 1Q-16 3Q-16 1Q-17 Rate of Companies Beating Sales Remains Strong Importantly, the percentage of companies exceeding sales estimates stands at 66%, well above the long-term average of 57%. This is also the third consecutive quarter that more than 60% of companies have exceeded sales expectations, which last happened in 2011. 80% 70% 60% 50% 40% S&P 500: Quarterly Sales Beat Rates (%) Average 66% 30% 20% 10% 0% Data Source: FactSet, SunTrust IAG *An sales beat rate occurs when a company s sales report exceeds the consensus estimate The S&P 500 is an unmanaged index comprised of 500 widely held securities considered to be representative of the stock market in general. An investment cannot be directly made into an index.
Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Corporate Earnings Estimates Head Upward Over the past month, more than half of the S&P 500 companies have seen their earnings estimates raised by analysts. This is the best level in over the past three years. 60% 50% 40% 52% 30% 20% 10% 0% Data Source: FactSet, SunTrust IAG The S&P 500 is an unmanaged index comprised of 500 widely held securities considered to be representative of the stock market in general. An investment cannot be directly made into an index.
Most Sectors Handily Beating Expected Earnings Cyclical sectors, such as technology, materials and financials, are among the areas showing the greatest percentage of companies exceeding analyst expectations. This is consistent with an improved global economy. On the other hand, interest-rate sensitive sectors, such as utilities and telecom, which also tend to be more defensive, are lagging. Technology Materials Health Care Financials Cons Staples Industrials Energy REITs Cons Discretion % Sector Earnings Beat Rate 78% 76% 76% 76% 74% 73% 72% 70% 89% Utilities Telecom 50% 50% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Data Source: FactSet, SunTrust IAG All sectors represented by the S&P GICs sectors, which in aggregate comprises the S&P 500. The S&P 500 is an unmanaged index comprised of 500 widely held securities considered to be representative of the stock market in general. An investment cannot be directly made into an index. Past performance is not indicative of future results.
Important Disclosures Advisory managed account programs entail risks, including possible loss of principal and may not be suitable for all investors. Please speak to your advisor to request a firm brochure which includes program details, including risks, fees and expenses. International investing entails greater risk, as well as greater potential rewards compared to US investing. These risks include potential economic uncertainties of foreign countries and the risk of currency fluctuations. These risks are magnified in emerging market countries, since these countries may have relatively unstable governments and less established markets and economies. Diversification does not ensure against loss and does not assure a profit. Services provided by the following affiliates of SunTrust Banks, Inc.: Banking products and services are provided by SunTrust Bank, Member FDIC. Trust and investment management services are provided by SunTrust Bank, SunTrust Delaware Trust Company and SunTrust Banks Trust Company (Cayman) Limited. Securities, brokerage accounts and insurance (including annuities) are offered by SunTrust Investment Services, Inc. (STIS), a SEC registered brokerdealer, member FINRA, SIPC, and a licensed insurance agency. Investment advisory services are offered by SunTrust Advisory Services, Inc. (STAS), and GenSpring Family Offices, LLC, each of which is registered as an investment adviser with the US Securities and Exchange Commission. SunTrust Bank and its affiliates and the directors, officers, employees and agents of SunTrust Bank and its affiliates (collectively, "SunTrust") are not permitted to give legal or tax advice. Clients of SunTrust should consult with their legal and tax advisors prior to entering into any financial transaction. While this information is believed to be accurate, SunTrust Banks, Inc., including its affiliates, does not guarantee the accuracy, completeness or timeliness of, or otherwise endorse these analyses or market data. Investment and Insurance Products: Are not FDIC or any other Government Agency Insured Are not Bank Guaranteed May Lose Value The opinions and information contained herein have been obtained or derived from sources believed to be reliable, but SunTrust Investment Services, Inc. (STIS) makes no representation or guarantee as to their timeliness, accuracy or completeness or for their fitness for any particular purpose. The information contained herein does not purport to be a complete analysis of any security, company, or industry involved. This material is not to be construed as an offer to sell or a solicitation of an offer to buy any security. Opinions and information expressed herein are subject to change without notice. STIS and/or its affiliates, including your Advisor, may have issued materials that are inconsistent with or may reach different conclusions than those represented in this commentary, and all opinions and information are believed to be reflective of judgments and opinions as of the date that material was originally published. STIS is under no obligation to ensure that other materials are brought to the attention of any recipient of this commentary. The information and material presented in this commentary are for general information only and do not specifically address individual investment objectives, financial situations or the particular needs of any specific person who may receive this commentary. Investing in any security or investment strategies discussed herein may not be suitable for you, and you may want to consult a financial advisor. Nothing in this material constitutes individual investment, legal or tax advise. Investments involve risk and an investor may incur either profits or losses. Past performance should not be taken as an indication or guarantee of future performance. STIS/STAS shall accept no liability for any loss arising from the use of this material, nor shall STIS/STAS treat any recipient of this material as a customer or client simply by virtue of the receipt of this material. The information herein is for persons residing in the United States of America only and is not intended for any person in any other jurisdiction. Investors may be prohibited in certain states from purchasing some over-the-counter securities mentioned herein. The information contained in this material is produced and copyrighted by SunTrust Banks, Inc. and any unauthorized use, duplication, redistribution or disclosure is prohibited by law. STIS/STAS s officers, employees, agents and/or affiliates may have positions in securities, options, rights, or warrants mentioned or discussed in this material. SunTrust Bank and its affiliates do not accept fiduciary responsibility for all banking and investment account types offered. Please consult with your SunTrust representative to determine whether SunTrust and its affiliates have agreed to accept fiduciary responsibility for your account(s) and if you have completed the documentation necessary to establish a fiduciary relationship with SunTrust Bank or an affiliate. Additional information regarding account types subject to DOL and important disclosures may be found at www.suntrust.com\investmentinfo. S&P 500 Index is comprised of 500 widely-held securities considered to be representative of the stock market in general. MSCI All Country World Index (ACWI) captures large- and mid-caps across 23 Developed Markets (DM) and 23 Emerging Markets (EM) countries. It covers approximately 85% of the global investable equity opportunity set. MSCI EAFE index is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the US & Canada. MSCI EM index is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets. CN2017-3161EXP12-2018