Charles Schwab Investment Management

Biweekly insights on the latest global investment news regarding equities and fixed income from our leadership team.

August 21, 2017

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  • Equities: U.S. stocks still near all-time highs

    Omar Aguilar, Ph.D.

    Chief Investment Officer,
    Equities and Multi-Asset Strategies

    Solid second-quarter earnings

    More than 90% of S&P 500 companies have reported second-quarter earnings. Approximately 75% of these companies beat earnings-per-share estimates, and more than 65% exceeded sales projections. Growth sectors like Technology, Health Care, and Industrials generated some of the best results, with large multinational companies benefiting from U.S. dollar depreciation earlier this year combined with overseas economic improvement.

    Uncertainty and valuations trigger volatility

    For the first time since 2011, companies that beat earnings forecasts have, on average, underperformed the market during the recent reporting season, illustrating that valuations are potentially stretched. Increased volatility has also been fueled by elevated concerns that President Trump will be unable to deliver corporate tax reforms this year. The recent underperformance of small-caps compared with large-caps reflects this backdrop.

    The U.S. dollar stabilizes

    The latest readings on consumer spending and retail sales underscored that the U.S. economy is growing at a healthy pace in spite of the limited rate of inflation. These readings, reduced geopolitical tensions, and signs that the euro zone’s economy continues to improve have helped the U.S. dollar stabilize in recent weeks after depreciating earlier this year.

  • Fixed Income: The Fed’s minutes in a minute

    Brett Wander, CFA

    Chief Investment Officer,
    Fixed Income

    September: Let the bond selling begin

    Last week the Fed released minutes from its late-July meeting. According to the Fed’s notes, the U.S. central bank will begin unwinding its $4.5 trillion balance sheet starting in September. The market seemed to fully expect this, but you never know how the Fed’s future messages will be received.

    December: Rate hike uncertainty

    The Fed’s recent minutes indicate that they are now split in terms of their perspective on a December rate hike. The market already knew this. But now the Fed has expressed this directly. It all comes down to inflation (see below).

    Inflation: Still not happening

    The continued lack of inflation is creating a meaningful divergence of views within the Fed. Some officials are focusing on the recent job growth and believe that inflation will naturally pick up, as it typically does when the economy is growing. However, others within the Fed want to see clear indications that inflation has reached their stated target of 2%. Unfortunately for these Fed governors, they may have to wait awhile.