Insights
into
key
market
performance
and
economic
trends
from
Dan
Kemp,
Morningstar’s
global
chief
research
and
investment
officer.
As
we
enter
the
last
quarter
of
the
US
earnings
season,
the
management
teams
at
large
companies
have
again
managed
to
create
a
positive
“surprise”
by
lowering
expectations
ahead
of
their
reports.
According
to
FactSet,
analysts
forecast
year-on-year
profit
growth
among
large
US
companies
to
be
3.4%
at
the
start
of
the
quarter,
whereas
we
are
on
track
to
witness
actual
growth
of
5.0%.
That
seems
like
a
win
until
you
consider
that
at
the
end
of
last
year,
first-quarter
earnings
were
expected
to
rise
by
more
than
6%.
This
gamesmanship
reminds
us
that
short-term
results
are
often
a
distraction,
rather
than
a
signpost
for
future
returns.
Apple
Pay
(Back)
Most
notably
last
week,
we
saw Apple’s (AAPL) results.
While
the
iPhone
maker
reported
lackluster
earnings
broadly
in
line
with
Morningstar
analyst William
Kerwin’s
expectations,
investors
reacted
strongly
to
news
of
a
$110
billion
buyback
program,
raising
the
stock’s
price
by
5.98%
on
Friday.
Although
the
capital
discipline
implied
by
this
move
is
welcome,
it
is
also
a
reminder
that
large
companies
have
limited
opportunities
to
reinvest
their
profits
to
fuel
future
growth.
Firms
with
fewer
such
opportunities
tend
to
trade
at
cheaper
valuations, as
other
“Magnificent
Seven”
stocks
are
discovering.
Fed
Remains
Paused
The
Federal
Reserve
has
also
managed
investor
expectations,
with
its
continued
lack
of
movement
on
interest
rates
being
calmly
received
by
market
participants.
However,
expectations
of
future
declines
remain
strong,
as
last
week’s
economic
data
was
slightly
weaker
than
anticipated.
Friday’s US
employment
report showed
an
unexpected
increase
in
unemployment
to
3.9%
from
3.8%
the
previous
month.
The
market’s
positive
response
to
this
news
reflects
a
strong
jobs
market’s
impact
on
inflation.
As
the San
Francisco
Federal
Reserve notes,
core
services
are
currently
the
main
source
of
inflation.
As
employment
costs
typically
represent
the
bulk
of
the
cost
of
services,
weakening
employment
growth
may
reduce
inflation
pressure
and
provide
more
opportunities
to
cut
interest
rates.
Are
Equities
Reflecting
a
Benign
Outlook?
With
limited
economic
data
this
week,
investors
will
likely
pay
close
attention
to
comments
from
various
Fed
leaders,
seeking
confirmation
of
a
slowing
economy
and
lower
future
interest
rates.
While
this
represents
a
benign
investing
environment,
this
outlook
already
appears
to
be
reflected
in
large
US
equities,
priced
near
their
fair
value
according
to
Morningstar
analysts.
However,
as
Morningstar’s
chief
US
market
strategist
David
Sekera
notes, there
are
attractively
valued
investment
opportunities in
other
parts
of
the
US
market.
Diversification
always
feels
least
attractive
when
prices
are
rising
in
our
core
investing
area
and
markets
are
calm,
but
that
is
typically
the
best
time
to
ensure
portfolios
are
robust,
whatever
the
future
holds. Zachary
Evens goes
deeper
into where
else
Morningstar
analysts
are
finding
value.
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