Key Points

• Economic data remain mixed, but there are reasons to expect improvements in the second quarter.
• We believe the recession in global earnings growth may be ending.
• Equity prices should trend higher over the coming year, although volatility will likely remain elevated.

The S&P 500 Index slipped 0.3% last week, is down about 3% from its recent high and is in marginally positive territory for the year.1 Economic growth concerns came to the forefront due to the relatively weak April jobs report. Politics also received increased attention as Donald Trump solidified his position as the presumptive Republican nominee. Commodity-related segments of the market came under pressure, while consumer staples and utilities outperformed.1

Weekly Top Themes

1. The nature of the job market may be shifting as we approach full employment. Payrolls rose by a less-than-expected 160,000 in April, while unemployment was flat at 5.0%.2 Average hourly earnings rose 0.3% and climbed 2.5% over the past year, the fastest rate since the Great Recession.2 As we approach full employment, it shouldn’t be surprising to see job growth slow and wages rise. We may also see the market start paying more attention to the second half of the Federal Reserve’s dual mandate — controlling inflation.

2. The manufacturing sector is finally growing, which should help the broader economy. The ISM Manufacturing Index in April was slightly below expectations, but at 50.8 was still in expansion territory.3 In fact, April marked the second month in which the index was above 50 after remaining below that level for the previous five months.3 This trend suggests to us that second quarter real gross domestic product growth is on track for a 2% to 3% pace.

3. U.S. growth faces headwinds, but the odds of a recession remain low. Negatives include low borrowing, falling multinational corporate profits, the drag from the energy sector, political uncertainty and weakness from China. The positives include low interest rates, low inflation, healthy domestic profits, strong consumer balance sheets, a decent housing sector and rising government spending. We believe the latter group outweighs the former.

4. The global corporate earnings recession may nearing an end. As of the end of March, global corporate earnings have declined by 7% on an annual basis.4 This marks the fourth straight quarter of annual declines, the worst performance since the Great Recession.4 Corporate earnings rarely shrink outside of economic contractions. Looking ahead, we expect a rebound in oil prices and some stability from China may help bring an end to this earnings recession.

5. The world remains in a bumpy period of economic healing, which should be a positive for equities. Despite the fact that equity prices have been rising for the last seven years, investor pessimism remains widespread. This isn’t surprising given the number of setbacks and still-weak economic growth. Despite the negativity, however, we believe we are starting a period of uneven global economic improvement that should eventually provide more stability for a sustained equity rally.

Risk Assets Should Climb in a Choppy Fashion

At present, the S&P 500 Index is close to where it was in the fall of 2014, meaning equities have been stuck in a highly volatile trading range for the last 18 months.1 Over the last few weeks, risk asset prices have trended lower as investors digested uneven economic growth signals. The recent weakness of the U.S. dollar has boosted commodity prices, which removed some deflationary risk from the markets. And policy support in China also helped. Our contention, however, is that investors need to see additional evidence that the global economy (and corporate earnings) are experiencing real, sustained improvements before equities and other risk assets can enjoy a more solid move higher.

Fears of recession have faded in recent months, but investors remain cautious. Global growth still relies heavily on supportive monetary policy and extraordinary actions from the world’s central banks. We do believe, however, that the global economy is experiencing real healing, which should help corporate earnings recover. As such, we think this backdrop is conducive to better results from equity markets over the coming year, while government bonds should come under more pressure. The ride won’t be smooth, and we expect volatility will remain relatively elevated.

1 Source: Morningstar Direct, as of 5/6/16 
2 Source: U.S. Bureau of Labor Statistics 
3 Source: Institute for Supply Management 
4 Source: BCA Research

Bob Doll is chief equity strategist at Nuveen Asset Management.