Silver lining to U.S. market sell-off: Fundamentals still seem to matter

NEW YORK U.S. companies posting strong earnings are still winning laurels from investors, even amid the broad stock sell-off over the last week, suggesting that the kind of indiscriminate selling seen the last time an apparent devaluation of China’s yuan spooked global markets is far from imminent.

Traders work on the floor at the New York Stock Exchange (NYSE) in New York, U.S., August 7, 2019. REUTERS/Brendan McDermid

High-flying stocks like Chipotle Mexican Grill Inc (CMG.N), Starbucks Corp (SBUX.O) and semiconductor equipment maker KLA Corp (KLAC.O) are all up 8% or more so far in the third quarter, after the companies posted strong earnings and forecasts, extending rallies that have lifted each company’s shares by 40% or more since the start of the year. The benchmark S&P 500 .SPX, meanwhile, has shed 2.3% since the start of the quarter as fears of a currency war between the United States and China lead more investors to question the strength of the global economy.

China allowed its currency to weaken past the key 7-per-dollar level on Monday for the first time in more than a decade, in response to the threat of a new round of punishing U.S. tariffs. The United States, in turn, labeled China a currency manipulator for the first time since 1994. A similar unexpected depreciation in the yuan in 2015 pushed the S&P 500 to the edge of a bear market.

The recent selloff has left the S&P 500 down nearly 5% from its record high close on July 26, with the technology index down over 6%. The S&P 500 ended Wednesday up 0.08% after spending most of the day in negative territory.

Bank stocks and other financials took an additional hit on Tuesday, hurt by increased expectations that the U.S. Federal Reserve will cut interest rates three more times by year-end.

Still, portfolio managers and strategists say that although the S&P 500 posted its worst day of the year on Monday, the market continues to reward companies that have strong fundamentals.

“There are fewer clear winning growth companies and in large cap there are fewer really attractive consumer names than a few years ago,” said Barbara Miller, a portfolio manager at Federated Investors. “The companies that are stronger fundamentally are pulling forward a little bit if they are in categories with any macro volatility.”

Katie Nixon, chief investment officer at Northern Trust Wealth Management, described the market as “stick-to-what’s-working,” saying that “we’re nowhere near a capitulation.

“If we get any sort of trade truce talk you could see the market rip from here and go up to its previous highs,” Nixon said.

Overall, companies are weathering the market sell-off roughly in proportion to their corporate results. Among the companies that have posted earnings since the S&P 500 touched its record high on July 26, the share prices of those that beat earnings estimates by 30 percent or more are down only 3 percent on average, while companies that missed expectations are down 7 percent on average, according to Refinitiv data.

S&P 500 companies whose full-year earnings per share estimates have been raised by analysts this reporting season have also outperformed since the index began its drop from the July 26 record high, reflecting investors’ greater confidence in those companies earnings.

Earnings per share are up 2.7% for the S&P 500 as a whole for companies that have reported second-quarter results, with roughly 73% beating analyst estimates.

“The underlying reality is that the fundamentals of the U.S. economy remain remarkably okay and earnings continue to outpace people’s worst fears,” said Jim Paulsen, chief investment strategist at independent investment research firm The Leuthold Group.

By comparison, the deep drops in share prices in August 2015 in the wake of the last unexpected decline in the yuan coincided with a global manufacturing recession that helped crater the price of oil and other commodities, Paulsen said.

“Earnings haven’t rolled over, and neither has the economy,” he said.

Reporting by David Randall and Noel Randewich; Editing by Jennifer Ablan and Leslie Adler

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