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Wall Street to Your Street


February Market Recap: Corporate Earnings Driving Stock Growth

The stock market continued to move up in February, bolstered by strengthening corporate earnings growth and solid consumer spending trends.

As it did in January, the S&P 500® set a new high in February, finishing the month with a 3.72% gain at 2,363.64.

city buildingsAfter tepid corporate earnings growth throughout most of the past two years, markets have been doing well in anticipation of improving fundamentals, with good fourth-quarter 2016 earnings growth fueling that anticipation.

The fourth quarter of 2016 marked the first time the S&P 500 Index has seen year-over-year growth in earnings for two consecutive quarters since the first quarter of 2015.

About two-thirds of S&P 500 companies performed above expectations in the fourth quarter of 2016, according to FactSet's Feb. 24 "Earnings Insight" report.

FactSet's report indicated that with 92% of S&P 500 companies reporting results for fourth quarter 2016, 66% beat their mean earnings per share estimate and 52% of the companies beat their mean sales estimate.

Eight of the 11 sectors had higher growth rates compared to the end of 2016, led by the real estate sector, according to the FactSet report. The higher rates were due to upside earnings surprises and upward revisions to earnings estimates.

Here are some other highlights from the month, covered in more detail later in this report (Exhibit 1):

  • Oil edges up. The price of oil edged up in February to $54.01 per barrel (West Texas Intermediate), as the oil market continued to stabilize.
  • Interest rate retreat. Market interest rates on 10-year U.S. Treasury bonds slipped in February, finishing the month at 2.39%.
  • Employment growth strengthens. Employment surged in January, marking the 76th consecutive month of job growth, according to the February U.S. Department of Labor Employment Situation report.
  • Retail sales keep climbing. Retail sales growth was up more than 5% year-over-year, according to the Feb. 15 retail sales report from the U.S. Department of Commerce.  

exhibit 1

Drilling down

U.S. stocks continue to move up

exhibit 2The S&P 500 continued its strong 2017 performance in February, moving up 3.72% from 2,278.87 at the close of January to 2,363.64 Feb. 28. The total return of the S&P 500 for February was 3.97% (Exhibit 2).

The NASDAQ also experienced a strong month, posting a 3.75% gain in February.

Employment continues to grow

After several subpar months of job growth, U.S. employers added 227,000 nonfarm payroll jobs in January, according to the U.S. Department of Labor, Bureau of Labor Statistics Employment Situation report issued Feb. 3.

The unemployment rate edged up slightly for the month, from 4.7% to 4.8% as more people entered the workforce in search of employment. The labor force participation rate for those in their prime working years (age 25 – 54) remained at a low level of 81.4%, which is about 1.6% below the prerecession level. (See "Paradoxes of the U.S. Labor Market".)

Retail sales keep climbing

Retail sales growth has been one of the strengths of the economy in recent months, and that trend has continued in 2017, according to the Feb. 15 retail sales report from the U.S. Department of Commerce.

Retail and food service sales were up 0.4% for January from the previous month (adjusted for seasonal variation and holiday and trading-day differences), and up 5.6% year-over-year.

With gasoline prices at much higher levels than a year ago, gasoline stations revenue was up 14.2% year-over-year. Online and related sales ("non-store retailers") have continued to grow, up 12.0% from a year earlier.

Sector returns

exhibit 3Exhibit 3 details the February performance and the 2017 year-to-date performance of each of the 11 S&P 500 sectors, as well as the total return of the S&P 500.

The energy sector continued to lag the market for the second straight month despite stable oil prices. It was down 2.19% – as gains across the broad market lifted nine of the other 10 sectors.

Leading sectors included health care, up 6.43%; utilities, up 5.28%; financials, up 5.20%; information technology, up 5.13%; consumer staples, up 4.95%; and real estate up 4.68%.

Bond yields retreat

exhibit 4After a large jump in November and December of 2016, yields on 10-year U.S. Treasuries have leveled off this year. Following almost no movement in January, yields slid slightly from 2.46% at the close of January to 2.39% at the end of February (Exhibit 4).

Dollar sees little change

After beginning the year declining in value versus the world's other leading currencies, the dollar bounced back somewhat in February – particularly versus the euro. The dollar was up 1.67% versus the euro for the month (Exhibit 5).

exhibit 5The dollar did, however, slide slightly versus the Japanese yen, down 0.61% for the month (Exhibit 6).

Little changes in oil prices while gold keeps rebounding

Oil prices have been trading in a tight range all year, as the oil market seems to have stabilized.

exhibit 6After closing January at $52.81 per barrel (West Texas Intermediate), oil prices ended February at $54.01, a 2.27% increase for the month (Exhibit 7).

Following an OPEC agreement Nov. 30, 2016 to cut production by 1.2 million barrels per day, oil moved up to over $50 a barrel in December, but there has been little movement in prices since.

While OPEC production has declined, U.S. producers, including shale oil producers, have ramped up production, slowly filling in the gap created by the OPEC production cuts.

exhibit 7Gold prices continue to rebound from a post-election slump at the end of 2016. Gold was up 3.5% for the month, rising from $1,211.40 January 31 to $1,253.90 to close February. Gold had ended 2016 at $1,151.70 per ounce (Exhibit 8).

International market moves up

As the U.S. equities market moved up, the international market rose as well. The MSCI EAFE Index closed the month at 1,753.09 after ending January at 1,732.38 – a gain for February of 1.20% (Exhibit 9).exhibit 8

CIO Outlook

By Russell Swansen, Chief Investment Officer

Here's what we see ahead for the economy and the markets: 


While oil prices have been stable in recent months, they remain at a relatively low level, with the global supply still outpacing demand.

exhibit 9The energy sector was the only sector of the S&P 500 to lose ground in February. It is down almost 6% for the year – even in the midst of a broad market rally.

While OPEC has managed to cut production in recent months, production increases elsewhere, including in the U.S., have offset some of the OPEC cuts.

The dollar has remained fairly stable relative to the other major currencies recently, but we still consider it to be relatively high. Some estimates suggest the dollar is about 20% overvalued versus the euro.

A strong dollar makes imports cheaper, but makes American goods and services less competitive abroad, and makes foreign earnings less valuable when translated into dollars.

Protectionist trade policies and tariffs could also make U.S. goods and services less competitive in foreign markets, and make foreign goods more expensive for consumers and businesses in the U.S.

Despite encouraging progress in corporate profit growth, we continue to be concerned about the pace of earnings growth, as well as weak manufacturing output levels.

We would also like to see more allocation of assets to fixed investments in areas such as structures, equipment and intellectual property. 

Although employment growth has been steady, wage growth has been slow, with median income below the 2009 level. Productivity growth has slowed markedly.

The relatively low workforce participation rate among workers age 25 – 54 also continues to be a concern.  (See "Where's My Raise? As Employment Climbs, Wage Growth Left Behind".)


Retail and food services sales have remained strong with year-over-year sales (adjusted for seasonal variation and holiday and trading-day differences) up 5.6% for January.

The housing market has also remained solid, with improved activity and rising prices in many parts of the country. As noted earlier, corporate earnings growth has also shown signs of life recently.

Employment continues to grow, with the unemployment rate remaining consistently under 5% since last summer. Increased infrastructure spending could lower the unemployment rate still further, boost the workforce participation rate, and push up wages, but the gains could come at the cost of steeper growth of inflation.

The financial sector, which had been one of the weakest parts of the economy in 2016, has had solid performance the past few months, as market interest rates for 10-year U.S. Treasuries continue to hover solidly above 2%.


The consensus view for real GDP growth is 2.3% for 2017 and 2.4% for 2018, according to the Blue Chip Economic Indicators. While this is a bit higher than recent growth, it seems muted compared to the optimism that we see in other sentiment indicators and arguably market values.

We have recently increased our estimate of growth to 2.7% for 2017, which is slightly higher than the consensus view.

The consensus view for inflation is 2.4% for 2017 and 2.3% for 2018. That is a bit higher than we might have expected, although rising wages along with increased consumer spending and additional government infrastructure spending would all likely contribute to rising inflation.

We believe that the Federal Reserve will follow up its December 2016 rate hike with a few additional rate hikes in 2017. The next rate hike will likely come within the next three months if the economy continues to strengthen.

We have increased our estimates for many foreign economies. Over the next 12 months, we estimate that China will have GDP growth of about 7.0%, Japan will have growth of 1.5%, Europe will have growth of about 2.0%, and the UK will grow about 3.0%.

Amidst optimism that the U.S. economy will continue to expand in the months ahead, current economic growth remains relatively slow.

We are not projecting a recession in the near term, but we believe the risk of recession in the next 12 months remains elevated, though slightly less elevated than a few months ago.

To continue the recovery, we believe that the job market needs to continue its steady growth, retail sales need to remain solid, and corporate spending and manufacturing production need to improve.

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