Below please find a link to our monthly market perspective piece for August. Due to the recent rebound in quarterly corporate earnings, this month we explore the importance of this fundamental underpinning to the equity markets.

1. Market Perspective – August 2017
Experience Insight Impact
Overview: With 2017 2Q earnings season largely complete, it appears the S&P 500’s sales and
earnings growth rebound continued, albeit at a more modest pace. This month we revisit
corporate earnings and peer into future expectations. Over time, earnings tend to drive market
performance, particularly when viewed in the context of valuations.
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2. Corporate Earnings Rebound Continues
Experience Insight Impact
• Second quarter S&P
500 earnings grew
9.8% year-over-year.
Sales also grew 5.5%
year-over-year.
• Since 2016 Q3, sales
and earnings growth
have rebounded.
Continued growth
with mid-single digits
is a promising sign.
Source: Bloomberg
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3. Earnings Were Generally Better Than Expected
Experience Insight Impact
Despite the always-present clouds of concern, these results are not only favorable, but also better than
expected. 73% of S&P 500 companies have reported positive EPS surprises (in aggregate 6.1% above
expectations) and 69% have reported positive sales surprises (in aggregate 0.7% above expectations).
Source: FactSet
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4. Proportion of Negative Guidance for 2017 Q3 Declines
Experience Insight Impact
The number of companies with negative guidance for 2017 Q3 was 59 compared to those with
positive guidance of 35. However, despite the outnumbering of negative guidance, the proportion of
negative guidance is below the 5-year average of 75%.
Source: FactSet
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5. Negative Price Reaction
Experience Insight Impact
Despite the earnings beat, S&P 500 stocks on average declined (from two days before the release to
two days after the release). Although earnings are important, we must be mindful that an earnings
“beat” does not necessarily translate into positive price movements.
Source: FactSet
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6. International Outperformed
Experience Insight Impact
After years of underperformance, earnings growth of international equities started to
exceed that of domestic equities.
Source: Bloomberg
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7. International Exposure Helped Domestic Equities Too
Experience Insight Impact
Growth in the earnings and revenues of S&P 500 companies with higher international exposure
exceeded those of more domestic-oriented companies. The green bars represent the growth of
companies with less than 50% of sales in the U.S.
Source: FactSet
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8. A Weaker Dollar Probably Helped Stocks
Experience Insight Impact
The dollar index declined 4.7% in 2017 Q2. Dollar weakness, considering that 30% of S&P 500 revenue
comes from abroad, was likely a positive factor in earnings performance. Moving forward, we must be
cautious as a rebound in the dollar may negatively affect stocks.
Source: Bloomberg
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9. Earnings Growth Expected to Continue
Experience Insight Impact
Notwithstanding likely future revisions, earnings growth is expected to continue.
Source: FactSet
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10. Market Perspective – August 2017
Experience Insight Impact
Conclusion: The current bull market was accompanied by several years of negative earnings
growth which resulted in elevated valuations (e.g. Price to Earnings ~ P/E). More recently,
earnings have continued to rebound and are expected to rise further into the future, boosting the
denominator in the standard P/E ratio and potentially making valuations look more reasonable.
We are actively monitoring policy related catalysts, which have been slow to develop. With
earnings growth continuing as an important part of the investment process, coupled with the
recently witnessed trends, flexibility remains essential.
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11. Disclaimer
Experience Insight Impact
Opinions expressed in this commentary may change as conditions warrant and is for informational
purposes only. Information contained herein is not intended to be personal investment advice for
any specific person for any particular purpose. We utilize information sources that we believe to
be reliable but cannot guarantee the accuracy of those sources. Past performance is no guarantee
of future performance; investing involves risk and may result in loss of capital. Consider seeking
advice from a professional before implementing any investing strategy.
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