Equity Overview

As the second quarter earnings season wound down, results continued at a blistering pace.  With 91% of S&P 500 companies reporting, the blended growth rate for second quarter earnings rose to 10.2%, which was even higher than the already impressive 9.1% rate at the end of July.  Interestingly, companies with more global exposure grew earnings significantly more than companies with more domestic exposure, to the tune of 14.0% to 8.5%.  Earnings beats held steady at a 73% pace and revenue beats continued impressive at 69%–both numbers that are well ahead of their 5-year averages.  Importantly, future earnings guidance was generally strong.

Continuing the trend for most of 2017, growth stocks outperformed value stocks during the month.  Uncharacteristically, earnings surprises did not correlate well with stock performance.  Overall, companies with positive earnings surprises lost 0.3% for the period from two days before to two days after their earnings reports.

The Dow Jones Industrial Average topped 22,000 for the first time.

Macro Overview

Economic news in August was the usual mixed bag.  Manufacturing, unemployment, and retail sales numbers were encouraging, and the Commerce Department revised its estimates of second quarter GDP growth upward from 2.6% to 3.0%–the fastest pace in two years.  However, wage growth, the housing market, and durable goods orders were weak.

Hurricane Harvey proved to be one of the most damaging storms in U.S. history, wreaking havoc in Texas and particularly in Houston.  Among other catastrophic impacts, it knocked out 20% of the country’s oil refining capacity.

Tax reform remains uncertain, as there appears to be disagreement within the administration on key elements– not to mention a wide range of views among Republicans in Congress.  While it appears that there is an appetite for reducing the corporate tax rate, there is consensus that a reduction from 35% to 15%, much ballyhooed by the president in the campaign, is a nonstarter.  There was no further word on any plan for infrastructure spending, which appears to be forgotten in the confusion surrounding tax reform.

North Korea continued to dominate international news, as it fired a midrange ballistic missile over northern Japan.  The Hermit Kingdom defies all attempts to modify its behavior and remains a conundrum for world leaders, but has had no lasting impact on the stock market.