from the August investment comments by Provident Investment
Through mid-July, the S&P 500 is up nearly 5 percent, a respectable start following 2017’s strong performance. The move higher has come despite what appears to be slowing, but still solid, global growth and concerns surrounding trade. President Trump recently proposed tariffs on $200 billion in Chinese goods after Beijing responded in kind to earlier tariffs on $34 billion of Chinese imports. The proposal is in addition to ongoing trade disputes with Europe, Canada and Mexico. Trade wars result in uncertainty that could slow business investment and potentially offset the tailwinds businesses are enjoying in the form of tax reform and regulatory relief. For now, the market seems to be shrugging off, though not completely disregarding, concerns related to trade, but it is a topic worth closely monitoring.
The Federal Reserve pointed to “solid” U.S. economic growth during the first half of the year in its semiannual report to Congress. This is supported by the Federal Reserve Bank of Atlanta’s forecast of 4.5 percent GDP growth in Q2, up from 2.0 percent growth in Q1. The report to Congress also reiterated that the Fed expected to continue to raise interest rates gradually given a strengthening economy. In the current rate cycle going back to December 2015, the Fed has raised interest rates seven times and it is projecting another two rate hikes by year-end.
The market doesn’t fully concur with this view. For the remainder of this year, the Fed is expected to raise rates again in September, but the market is only placing approximately 50-50 odds of another rate hike in December. Developments surrounding trade have the potential to disrupt current plans, though communications from Chairman Powell have been consistent that a solid job market, inflation near the Fed’s objective and balanced risks to the outlook mean gradual increases to the Fed Funds rate is appropriate….
A good sign for the upcoming earnings season is that the consensus forecast for S&P 500 earnings has increased since early June, marking the second quarter in a row where forecasts increased heading into earnings season. The usual Wall Street dance is to instead reduce estimates into the announced results, lowering the bar for companies and allowing for an “earnings beat” once quarterly results are released. To be certain, there remain risks, but if earnings come in as expected, 2018 will have produced strong corporate results through its midpoint.