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Earlier in the week, we shared that the stock market is coming to grips with something we've been talking about for quite some time: the disconnect between the speed of the domestic economy, earnings expectations and the steady rise in the stock market (through the end of February). Granted, March has been much different, with the S&P 500 trading pretty much sideways, which we chalk up to investors focusing more and more on that disconnect, including the stalled momentum in Washington. The new administration has had a number of snafus to deal with that have pushed back the timing of more economically stimulative policies such as infrastructure spending and tax reform.
All of this is leading investors to rethink growth expectations, and we're seeing that reflected in first-quarter 2017 earnings estimates. Meanwhile, over the last several weeks the Atlanta Fed has been lowering its GDPNow forecast for the current quarter. It started off at more than 3% in January and fell to a low last week of 0.9% before being revised higher this morning to a whopping 1.0%.
Then we received the March Flash US Composite PMI that showed manufacturing and services tumbling to multi-month lows with businesses once again becoming cautious per the move lower in new order activity. We also saw another tick up in input cost inflation based on Markit's findings that "the overall rate of input price inflation was the fastest for two-and-a-half years. Efforts to pass on higher costs contributed to an upturn in factory gate price inflation to its strongest since November 2014." In our view, this is more evidence of looming stagflation.
Friday morning we received the February durable orders report, which on its face was better than expected, but stripping out aircraft and defense-related items core capital goods fell 0.1% month over month. Paired with a 0.1% increase in January, this report is not exactly a harbinger of strong business investment. This is another reason to think the current quarter's GDP is apt to be much slower than 4Q 2016's 1.9% reading.
Now let's turn from the speed of the economy to earnings expectations. As we entered 2017, the expectation was that S&P 500 companies would grow their collective earnings more than 12% compared to 2016. But even before we get March-quarter results, the view on 2017 earnings growth for the S&P 500 has fallen to just over 10%. With several highly anticipated Trump policies getting pushed out and more economic data pointing to a once again slowing economy, odds are companies will have to reset EPS expectations for 2Q 2017 and most likely 3Q 2017 as well, which means we are likely to see full-year 2017 projections come down further.
As this happens, the market will likely continue to wake up to current valuation levels, especially since if the price of the S&P 500 remains steady and earnings estimates get cut, the market valuation will climb. However, odds of that happening are rather low given the market's stretched valuation and it would mean paying more for even slower earnings growth. What this means is we're likely to see the market move lower over the coming weeks as all of these expectations get reset. We have ample cash in the portfolio to take advantage of that should it come to pass.
After today there are just five trading days left in the quarter, and a number of companies will soon be entering their "quiet periods," which means we're going to be scope up, as it were, for potential earnings pre-announcements. If we get more than usual, or from some larger blue-chip companies, we could see the market get a little bouncy. In times like that, we'll look to scale into positions where it makes sense as well as strategically add new ones to the portfolio.
Several positions took some lumps this week, including AMN Healthcare (AMN) , CalAmp (CAMP) and Dycom (DY) . The hardest hit was AMN, which we attribute to the uncertainty in Washington over the GOP's plan to replace the Affordable Care Act. We'll be watching the developments, but if the ACA remains, we're likely to be buyers of the shares next week.
Lumps aside, there were some positives as well. With the expected win by Dycom customer AT&T (T) next week for a 25-year deal to build and maintain the much-anticipated nationwide public-safety broadband network, we are likely to see some lift in DY next week. Longer term, the continued buildout in 4G and existing broadband capacity as well as the deployment in 5G networks bodes well for DY.
Meanwhile, International Flavors & Fragrances (IFF) continued its now several weeks long streak of moving higher. The shares are well off their February lows and are now encroaching on our price target.
Looking at those last five trading days of the month, we'll get the third estimate for 4Q 2016 GDP as well as February personal income & spending. On the earnings front, we have no companies reporting, but we will tune into the results for Darden Restaurants (DRI) , Sonic (SONC) , Dave & Busters (PLAY) , Restoration Hardware (RH) and Lululemon (LULU) . While we don't own those five companies in the portfolio, we'll be watching the results to gauge consumer spending and preferences.