For April 2018 the PNC-CivicScience Investor Sentiment Index (ISI) continues to trend lower, reflecting weakening investor confidence. Investor optimism, as measured by the poll, had been steadily rising from September 2017 through January 2018. After sentiment in January reached the highest level reading since the poll began in November 2016, February’s results reflected a shift in expectations. April’s reading reflects the third consecutive month of softening confidence. U.S. financial markets began 2018 on a strong note after tax reform legislation was passed in late 2017. Volatility returned to the markets in February after an extremely sanguine 2017. A number of uncertainties had markets trading lower, and the S&P 500® fell through a 10% correction point. It is normal for stocks to experience declines from time to time, and U.S. equities had gone longer than normal without having had any type of correction. In our view, a 10% correction was not unwarranted based on historical data provided by Ned Davis Research. Since then, stocks have recovered some of what was lost, while on a year-to-date basis the S&P 500 is down less than 1%. April 2018 poll results further highlighted a more cautious view and is the first month the ISI dipped below a reading of 50. The ISI declined to 48.8 in April from 50.4 for March.
Looking at the financial markets, while volatility eased as the month of April progressed, levels are still elevated versus 2017. April headlines included worries over the potential of trade wars, given U.S./China trade talks, as well as geopolitical concerns surrounding Syria and North Korea. Fundamentals remain solid, and the beginning of first-quarter 2018 earnings season reflected optimism for profit growth by U.S. corporations. First-quarter 2018 earnings season commenced in mid-April, and the majority of companies in the S&P 500, that have reported to date, are exceeding expectations. According to FactSet Research, the blended earnings growth rate with more than half of S&P 500 firms having reported has risen to over 23.0%, up from the initial estimate of 17.1%, and if realized would be the strongest rate of growth in more than seven years.
Profit margins are at record levels. The strongest growth rate by sector is being posted by Energy, Materials, Information Technology, and Financials. The growth rate for 2018 earnings for the S&P 500 is 19.4% year over year, up from the 12.0% estimate at the start of the year.
First-quarter 2018 GDP slowed versus fourth-quarter 2017 to 2.3%, with growth in consumer spending at the slowest pace since 2013. The job market remains strong, with the unemployment rate at 3.9% for April, an improvement from March’s 4.1 %. The Consumer Price Index accelerated in March to 2.4% year over year, versus the prior month’s 2.2 %. Consumer confidence remains strong and for April the reading unexpectedly rose to 128.7 versus the prior 127.0.
The market-implied probability the Federal Reserve (Fed) will raise rates four times this year versus just three has been slowly rising. PNC economists currently expect three rate hikes in total for 2018, with the next increase, predicted for the Fed’s June meeting, and then again in December. But if inflation pressures build more rapidly than expected, the Federal Open Market Committee could raise the federal funds rate three more times this year — in June, September, and December.
Individual Poll Questions
Question 1: Six months from now, do you think business conditions overall will be more favorable or less favorable to large, publicly traded companies?
Sentiment surrounding Business Conditions have continued to trend lower this year. The Business Conditions poll reading dipped in April to 52.1, versus the prior 54.3. We note that the tax reform legislation includes corporate tax cuts and other potential benefits for companies which could have affected how poll participants viewed business conditions, likely adding to the stronger readings in December 2017 and January 2018. U.S./China trade tensions continue as the countries seek to find resolution. While the poll-reading declined, the results continue to suggest that businesses remain optimistic regarding conditions in the next six-month period for large, publicly traded companies. From an economic data perspective, manufacturing conditions remain robust. The April Institute for Supply Management (ISM®) Manufacturing Purchasing Manager Index was 57.3 for April, reflecting strong conditions, while slightly below the 59.3 for March.
Question 2: When it comes to U.S. stock markets, would you say that you feel bullish (optimistic) or bearish (pessimistic) right now?
The PNC – CivicScience ISI Bullish/Bearish sentiment suggests that more poll participants were bullish versus bearish about U.S. stock markets in April; however, they were less bullish than in any of the last 12 months. Bullish sentiment rose through the months of 2017, peaking in January 2018 before beginning to ease.
Bullish vs. Bearish sentiment accelerated in the second half of 2017 to a peak in January 2018. In April, the sentiment reading slipped to 52.0 from March’s 53.0.
Fundamentals remain solid, and the economic expansion is forecast to continue in 2018. PNC economists are forecasting a temporary dip lower in first-quarter 2018 economic growth on slower consumer spending before rebounding in the second quarter. Consumer confidence as measured by the Conference Board for April unexpectedly rose, at 128.7 versus the prior 127.0.
Question 3: Six months from now, do you expect to invest in stocks/equities at a higher or lower rate than you are currently investing?
Sentiment towards Personal Investment asks poll participants to consider whether they will be more or less likely to invest in stocks six months versus their current view. Individuals are likely to respond to headlines from a more personal view than the business community. Personal Investment Sentiment turned lower in April, falling to 42.3, versus March’s 44.1.
The PNC – CivicScience Investor Sentiment Index (ISI) poll results for April suggests poll respondents were less optimistic compared with last month, and have been less so since the start of the year. Investor Bullish versus Bearish sentiment declined, as did the poll reading for Business Conditions. From a personal investment perspective, respondents were slightly less optimistic in terms of investing in stocks six months from now.
The next PNC – CivicScience Investor Sentiment Index will be published in June.