• With the U.S. economy improving and corporate earnings accelerating, we think U.S. stocks are looking attractive.

• Investors are closely watching some critical upcoming events, including this week’s Fed meeting, the North Korea summit and trade negotiations.

• We see several potential stumbling blocks for equity markets, but near-term risks may be receding.

Last week was relatively quiet for equity markets in terms of major news. Investors appeared to be focusing on some high-profile upcoming events, including this week’s Federal Reserve policy meeting, the U.S. summit with North Korea and the pending decision on the AT&T/Time Warner merger. Investors also seemed to shrug off ongoing risks of a possible trade war between the U.S. and China. Stocks prices rose last week, with all major U.S. indices finishing up more than 1 percent.1 The utilities sector was the only area to decline.1

Weekly Top Themes

1. U.S. real gross domestic product growth could be as high as 4 percent in the second quarter. The New York Fed is forecasting 3.3 percent, while the closely watched Atlanta Fed is targeting 4.8 percent.2 Growth appears to be rebounding thanks to better weather, rising consumer spending levels and inventory rebuilding.

2. Rising capital expenditures are becoming an important economic growth engine. Strength in this area should bolster the economic expansion by sustaining growth in goods-producing jobs and promoting labor force participation. More importantly, rising cap ex levels should continue supporting productivity growth. Cornerstone Macro recently published a long list of reasons why cap ex should continue to grow: tax cuts and cap ex expensing changes; rising corporate profits; less regulation; the U.S. energy renaissance; low industrial electricity expenses; less competition from China; old and unproductive capital equipment; growing capacity constraints; and still-easy financing.3

3. Stock prices are close to breaking out of their trading range. Stock prices have been unevenly advancing since early April, when prices approached the lows established in the February selloff. The S&P 500 Index is now close to its high of 2,875.1 Several upcoming events could provide a catalyst for further upside. The North Korea summit is not expected to produce specific deliverables, but if the parties can open lines of communication, it will likely be viewed as a success that could ease geopolitical tensions. Additionally, markets anticipate approval for the AT&T/Time Warner merger, which would create a more positive merger-and-acquisition backdrop. And while the White House continues tough talk on trade, negotiations are ongoing and trade tensions may start to ease. Against this backdrop, corporate earnings remain solid. Current S&P 500 consensus earnings estimates are $158 in 2018 and $175 in 2019.1 We think stock valuations look reasonable at these levels. As long as corporate earnings hold up, we anticipate stock prices should be able to climb higher.

Near-Term Risks For Equities Appear To Be Fading

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