Optimism Cools as Temperatures Rise

2018-07-10T17:55:27+00:00 July 10th, 2018|

Overall Index

The PNC-CivicScience Investor Sentiment Index (PNC-CS ISI) moderated in June, reflecting cooler optimism than in May. Investor optimism, as measured by the poll, had been steadily rising from September 2017 through January 2018. After peaking in January, sentiment began to fade and declined in each of the next three consecutive months. In May, the poll results rebounded off of April’s low reading, before easing a bit in June. The June 2018 results reflect a slight softening in optimism from poll participants, after May’s sharp rise higher. The ISI moderated to 50.5 in June, from 51.2 for May (Chart 1). Trade war uncertainties drove market volatility higher in June after the United States announced additional tariffs on Chinese goods. Trade headlines were constant through the month, as announced tariffs were quickly met with threats of retaliation. Beyond the United States, global markets also sold off in response to trade policy uncertainties. However, fundamentals remain sound as the U.S. economy continues to expand and the corporate profit outlook for domestic companies this year indicates robust growth. 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 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 as U.S. equities had gone longer than normal without having had any type of correction, a 10% correction was not unwarranted. Stocks have recovered some of what was lost, despite ongoing headline uncertainties and volatility, and markets are back in positive territory for the year. The S&P 500 is up 1.7% on a year-to-date basis through June 30, 2018. Including the reinvestment of dividends, the S&P 500 total return is 2.6%.

Second-quarter 2018 earnings season will commence in mid-July, and earnings forecasts for the quarter are quite strong. The estimated earnings growth rate for the S&P 500 is 20% 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 20.5% year over year, up from the 12.0% estimate at the start of the year.

First-quarter 2018 GDP slowed versus the fourth- quarter 2017, and was revised lower in June to 2.0%, but is expected to rebound in the second quarter. The job market remains strong, with the unemployment rate at 3.8% in June, unchanged from May. The Consumer Price Index accelerated to 2.8% year over year in May, versus the prior month’s 2.5% pace. Consumer confidence slipped in June to 126.4, from a revised higher 128.8 for May.

As expected the Federal Reserve (Fed) raised interest rates by 25 basis points at its meeting in June. The median forecast by Federal Open Market Committee (FOMC) members now indicates the committee expects to raise rates twice more in the second half of 2018, a change from the prior meeting which reflected only one hike. This shift now estimates the Fed will raise rates a total of four times in 2018, versus the prior forecast of three hikes.

The FOMC could next raise rates at the September and December meetings.

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 eased
a bit in terms of optimism in June versus May.
The Business Conditions poll reading fell to 53.7 in June versus the prior 55.1 (Chart 2). We note that
the ongoing trade war worries could affect corporate outlooks, and tariffs imposed on imports could potentially affect forward profits in terms of higher costs of supplies. 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. Fundamentals for U.S. corporations remain sound, and economic data indicate solid manufacturing conditions. The Institute for Supply ManagementTM (ISM) Manufacturing Index expanded further in June to 60.2, which surpassed estimates and was higher than May’s 58.7.

Question 2: When it comes to U.S. stock markets, would you say you feel bullish (optimistic) or bearish (pessimistic) right now?

The PNC-CS ISI Bullish/Bearish sentiment suggests that that more poll participants were bullish versus bearish about U.S. stock markets in June. However, respondents were slightly less bullish than in May. Bullish sentiment rose through the months of 2017, peaking in January 2018 before beginning to ease. Bullish vs. Bearish dipped to a low reading of 52.0 in April before shifting higher in May to 54.8, and was slightly lower again in June at 54.3.

Fundamentals remain solid, and the economic expansion is forecast to continue in 2018.

First-quarter 2018 economic growth dipped lower
on slower consumer spending but is expected to rebound in the second quarter. For full-year 2018, PNC economists expect 3.0% GDP growth, an acceleration from the 2.3% pace in 2017.

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 from now versus their current view. Individuals are likely to respond to headlines from a more personal view than the business community. Personal Investment sentiment was little changed in June, moderating slightly to 43.5, versus May’s 43.7.


The PNC-CS ISI poll results for June suggests a slight softening in poll respondents’ optimism. Investor Bullish versus Bearish sentiment weakened, 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-CS ISI will be published in August.