Economic, Company Fundamentals Leading To Higher Equity Markets

Blog of HORAN Capital Advisors | Aug 25, 2014 01:59AM ET

Almost two weeks ago we noted the S&P 500 Index appeared to look more attractive from a technical perspective. Since the market reached a near term low of 1,909.57 on August 7th, the S&P 500 Index has rallied 4.13% through Friday to close at 1,988.40. In addition to a positive technical perspective at that time, recent economic and company reports indicate potential strength ahead. In looking at several economic factors, last week's report on Federal Reserve reported the sixth straight monthly increase in industrial production with July's increase of .4%.

The continued improvement in the LEI Index and industrial production is showing up in the ISM non-manufacturing survey, specifically in new orders. The report noted,

"the New Orders Index registered 64.9 percent, 3.7 percentage points higher than the reading of 61.2 percent registered in June. This represents the highest reading for the New Orders Index since August 2005 when it registered 65.3 percent."

The early August report notes respondents indicating strength in the second half of this year as well. A couple of direct highlights from the report:

"Conditions are improving." (Construction)

"Slight improvement in the economy, but still experiencing delays in client project start-ups. Expecting some improvement in 4th quarter." (Professional, Scientific & Technical Services)

"Second half of the year is looking promising for increased orders versus last year." (Information)

"Business is still very good. Expecting continued growth in the 2nd half of the year." (Retail Trade)

"Business has been strong this summer after a late start due to the poor spring weather." (Wholesale Trade)

Lastly, with the second quarter 2014 earnings season essentially at an end with 486 companies having reported, the year over year growth rate for earnings in the quarter came in at 10.2% (excluding Citigroup (NYSE:C). It is not anticipated the remaining companies yet to report will change the 10+% growth rate. Thomson Reuters notes, if this growth rate holds, it will represent the second highest quarterly growth rate since the fourth quarter of 2011. The revenue growth rate recorded so far in Q2 is 4.6% with the health care sector leading the way with revenue growth of 12.2% in Q2.

Investors and strategist may be viewing the coming end of QE as a brick wall for the economy. However, current economic reports and company reports are suggesting the economy may be able to function without outside stimulus. I have not touched on the improvement in the job market, but this is another positive as well. I will highlight some of these items in our Week Ahead Magazine post, but several market moving reports in the coming week include the second reading on Q2 GDP and jobless claims on Thursday.

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Written By: Blog of HORAN Capital Advisors

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