April 2017 is a busy month, with several potentially market-moving global events to monitor closely. 2017 has seen global equity prices soar to new highs, with the S&P 500 Index up 5.5% in the first quarter, the best performance to start a year since 2013. Additionally, it has been one of the least volatile quarters ever across most asset classes as measured by daily standard deviation of returns; but as we’ve seen over the past few years, this can change quickly. As we turn the page to April, it is important to stay on top of the significant happenings coming up. To help, we’ve created this guide to the April 2017 market calendar, providing an overview of key events.
EARNINGS SEASON BEGINS
First quarter 2017 earnings season begins next week and starts in earnest on Thursday, April 13, with several big banks slated to report. Following a strong showing in the fourth quarter when S&P 500 earnings rose 8% year over year, consensus for first quarter earnings growth is a very solid 10.2%, according to Thomson Reuters data. We would not be surprised to see earnings growth potentially in the 12 – 14% range when all results are in. This is based on the strength of U.S. and foreign economic data in recent months and the historical pattern that companies tend to beat consensus estimates by around 3% each quarter. Financials, technology, and energy are expected to be the biggest contributors to overall earnings growth. The U.S. dollar, which has weighed on earnings over the last year, should only present a modest headwind. Market participants will again be focused on Washington, D.C. policy this earnings season. We do not believe current estimates reflect much direct policy impact; therefore, the fact that little progress has been made on corporate tax reform, the healthcare overhaul, infrastructure, or deregulation, may not lead to earnings shortfalls. That being said, it is possible that a challenging path to policy implementation may be more evident in management guidance. Consensus S&P 500 estimates for full-year 2017 are calling for a 10% increase over 2016, a forecast that we believe has some policy optimism built in and may see modest downward revisions in the months ahead. Our 2017 S&P 500 earnings growth forecast remains high-single digits.* Look for our earnings preview in next week’s Weekly Market Commentary.
The next major global political hurdle is the French elections, where the focus has been on the National Front (FN) Party of Marine Le Pen. The FN will almost certainly be one of the two biggest recipients of votes during the first round of the elections held on April 23. The top two vote getters will move on to a second round of elections on May 7. The FN will likely be excluded from any government coalition by whichever party is the eventual winner in the second round of elections, lacking sufficient allies in other parties. We think too much of the focus in the French elections has been on the wrong place. The important matter is the relative performance of the more traditional parties, the more moderate En Marche (EN) party of Emmanual Marcon or the more conservative Republican Party of Francois Fillon. Of the two, Fillon has been pulled more to the right by Le Pen, echoing her policies on immigration and border security. However, unlike Le Pen, Fillon continues to support France’s membership in the European Union and its adoption of the euro. Both Fillon and Marcon have a similar ideological bent and would agree on the basics of policy changes, though each leader emphasizes different things. Fillon has focused on cutting state spending and reducing the size of the government. He has also called for much tighter immigration controls and increasing anti-terrorism efforts. Marcon has concentrated his rhetoric on improving France’s highly restrictive labor market by abandoning the 35-hour work week and other employment rules. We believe the populism shown by the FN, and its pull on traditional French political parties and French voters, may have been a hindrance to the euro and to French stocks. Provided that there is
a clear victory for either party, one that minimizes the impact of the FN with respect to the French government and French politics going forward, both the euro and French stocks could potentially rally in the short term. Should the FN poll well enough to force its way into government, or become a more permanent part of the political scene, that would likely spell weakness for the euro.
SPENDING BILL EXPIRES
On April 28, the current temporary spending bill to fund the government expires, creating the prospect of a government shutdown. In order to avert a shutdown, Congress will have to pass a new continuing resolution to extend funding. The simplest continuing resolutions extend government funding at current levels, but continuing resolutions can also include modifications or added provisions that can lead to potential conflict. Government shutdowns aren’t uncommon but are usually very brief as partisan brinksmanship quickly yields to a reluctant pragmatism. Odds of a shutdown are low this time around, with Republicans likely to avoid a legislative path that can easily be framed as an inability to govern given their setback in replacing the Affordable Care Act (ACA). Nevertheless, there may be maneuvering in the House as the deadline approaches to create and control spin around such hot-button issues as funding President Trump’s border wall, increasing defense spending without an accompanying increase (or even a decrease) in non-defense spending, or an attempt to defund Planned Parenthood. Even with a shutdown unlikely (and probably short lived if it occurs), escalating political theater could rattle markets given the already uncertain policy environment; but without further catalysts, any market retreat is likely to quickly reverse as tensions settle. Notably, April 29, will mark the president’s 100th day in office, which could add to the drama as all sides try to shape the message around this milestone.