Through Friday, 85% of S&P 500 companies have reported their second quarter earnings results. On the surface, the numbers look okay, with 75% of companies beating analyst estimates for earnings and 50% beating estimates for revenues. Digging deeper into the results, however, some weakness becomes apparent. On average, companies contracted at the top-line by 4.5% vs 2Q14, and at the bottom-line by 2.3% year/year. The outlook for 2H15 and 2016 earnings growth has come down slightly, as management teams caution on currency effects and sluggish growth in certain overseas markets. The decline in commodity prices has negatively impacted emerging markets, which, until now had been a driver for U.S. manufacturing companies. The slowdown in Chinese growth has also had an impact. In addition, the decline in the price of oil has caused weakness in energy companies, and a secular change in how Americans consume entertainment has affected media companies. These trends, along with an abundance of new bond issuance and concern over the Fed raising rates, have pushed corporate credit spreads to their widest level of the year (see below). We added to our front-end corporate positions late last year and again at the end of Q2, taking our corporate exposure from underweight to neutral compared to our strategy benchmarks. The risk/reward dynamic from owning corporate bonds has become increasingly compelling to us, and if spread widening continues, we may look to take advantage in select credits.
BofA/Merrill 1-10yr A-AAA Corporate Index
Sources: Bloomberg, JMS, JP Morgan