The PNC-CivicScience Investor Sentiment Index (“ISI”) is a “living,” survey-based measurement of U.S. adults’ current attitudes and expectations related to the U.S. financial markets, investment climate, and market outlook. The primary goal of the ISI is to monitor changes in consumer and investor attitudes, to better anticipate investment trends, market movements, and overall U.S. economic health.
A Snippet of Our Latest Reading:
The PNC-CivicScience Investor Sentiment Index (PNC-CS ISI) moderated again in July, reflecting cooler optimism than in June. Investor optimism, as measured by the poll, had been steadily rising from September 2017 through January 2018. After peaking in January at 55.1, sentiment began to fade, and has steadily declined to 49.8 in July. The July 2018 results reflect a slight softening in optimism from poll participants. The PNC-CS ISI moderated to 49.8 in July, from 50.5 in June. Trade war uncertainties continued to drive market volatility after the United States announced the possibility of additional tariffs on Chinese goods. Trade headlines continued to escalate throughout the month, culminating in additional threats by the United States to raise the tariff rates already on the table. However, fundamentals remain sound as the U.S. economy reported 4.1% real GDP growth in the second quarter and earnings growth is tracking near 24%. U.S. financial markets were strong out of the gate in January 2018, after tax reform legislation was passed in late 2017. Volatility returned to the markets in February after an extremely calm 2017. A number of uncertainties had markets trading lower, and the S&P 500® fell 10% from its year-to-date high. It is normal for stocks to experience declines of this magnitude, and as U.S. equities had gone longer than normal without having had any type of correction, a 10% drop was not unexpected. Stocks have recovered most of what was lost, despite ongoing headline risks, and markets are back in positive territory for the year. The S&P 500 is up 5.3% on a year-to-date basis through July 31, 2018. Including the reinvestment of dividends, the S&P 500® total return is 6.4%. Despite moderation in the PNC-CS ISI this year, the markets remain resilient.
As mentioned, second-quarter 2018 earnings season has been very strong. The estimated earnings growth rate for the S&P 500 is 23.5% for the second quarter versus a year earlier, and if realized, would be the second highest quarter for growth since 2010. The strongest growth rate by sector is estimated for Energy, Materials, Telecommunication Services, and Information Technology. The growth rate for 2018 earnings for the S&P 500 is now forecast at 20.8% year over year, up from the 12.0% estimate at the start of the year. We expect the economic expansion to continue in 2018 and 2019, aided by fiscal stimulus from tax cuts and an increase in federal spending. Second-quarter real GDP growth rebounded to 4.1%. PNC forecasts GDP growth of 3.0% for all of 2018, up from 2.3% last year. The near-term outlook for growth is strong. The job market remains strong, with the unemployment rate at 4.0%, up slightly from the previous reading as people returned to the labor force. Rhetoric surrounding midterm elections will likely begin to heat up as we head into late summer and early fall. Given the highly charged environment and the history of midterm election years, a rise in market volatility is possible, most often caused by a policy event. Examples include attempts to impeach President Bill Clinton in 1998, steel tariffs in 2002, geopolitics in 2006, and the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010. Midterm election years have seen larger-than-average intra-year drops of 19% compared with 13% in the other three years of the presidential terms. However, these downtrends tend to be fleeting, as the S&P 500 has not declined in the 12-month period following any midterm election since 1946.