Charles Schwab Investment Management

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

July 24, 2017

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  • Equities: Elevated earnings expectations

    Omar Aguilar, Ph.D.

    Chief Investment Officer,
    Equities and Multi-Asset Strategies

    Dollar slide amid political gridlock

    The U.S. dollar dropped to an 11-month low versus a basket of international currencies last week as the Senate failed to reform health care. This political setback called into question President Trump’s ability to push through his pro-growth initiatives on infrastructure spending and tax reform, which are expected to be far more congressionally divisive. Increased volatility over the next few weeks is possible as the financial markets scale back expectations and acclimate to the potential for ongoing gridlock.

    Q2 Corporate earnings season

    Expectations for earnings-per-share growth and profit-margin expansion in the current earnings season seem elevated for most economic sectors due to the improving global growth backdrop. The Energy sector is a notable exception, suffering from headwinds caused by flagging commodities prices that represent challenges for earnings growth. Given the U.S. dollar’s weakness, select large-cap U.S. companies with significant overseas revenue streams have the potential to post upside earnings surprises.

    Opportunities among emerging markets

    As global growth quickens and central banks evaluate stimulus reductions, emerging market opportunities should arise, particularly for stocks in countries less sensitive to commodities prices. Diminishing risks of a hard landing in China and Europe’s ongoing recovery are tailwinds for future growth and profits.

  • Fixed Income: Potential thorns amid the roses

    Brett Wander, CFA

    Chief Investment Officer,
    Fixed Income

    Will corporate spreads continue to tighten?

    The yield advantage of investment-grade corporate bonds over like-maturity Treasuries recently dipped below a full percentage point. “Spreads,” or the yield difference between investment-grade corporate bonds and Treasuries, haven’t been this tight since 2014. If corporate yields fall much further, we could reach lows last seen a decade ago. So even though a 3% yield on a corporate bond might sound pretty attractive compared with 2% on a Treasury bond, the yield difference is anything but a bargain.

    What’s been causing spreads to tighten?

    First of all, corporate earnings are at record highs, led by Energy, Financials, and Technology. Healthier balance sheets for financial and commodity-related companies have contributed to the cause. Additionally, there has been really strong overseas demand for higher-yielding U.S. bonds due to the generally improving prospects for the U.S. economy compared with ongoing uncertainty in Asia and a few other key credit markets.

    What could go wrong?

    The picture isn’t all rosy. Commodities prices are still volatile. This makes bonds issued by Energy companies subject to a variety of risks. Additionally, consumer-driven industries are always susceptible to pricing pressures; who hasn’t bought something from Amazon lately? Finally, if a risk-off trend seized stocks, it could be spell big problems for corporate bonds.