Highlights
• A strong corporate earnings season along with solid economic growth should provide support for equity prices.
• Trade tensions intensified as new tariffs were announced, halting recent equity market gains.
• Inflation has been moving higher but is still at low levels.
Major U.S. equity indexes were mixed last week. Geopolitical concerns continued to fuel headlines, with the United States and China both announcing an additional $16 billion of tariffs to be enacted later this month. The U.S. reimposed sanctions on Iran. President Trump announced that metals tariffs on Turkey would be doubled, causing the lira to sell off 20 percent against the U.S. dollar from Thursday into Friday. The S&P 500 Index ended the week down 0.25 percent, breaking a five-week streak of gains.1 Consumer discretionary led the pack, and consumer staples and REITs lagged.1
Weekly Top Themes
1. Trade tensions have escalated but also become more concentrated on the United States and China relationship. Other trade disputes have been taking a more constructive direction. In our view, this suggests that the White House is likely to move forward to impose additional tariffs on imports from China, even while the outlook for automobile tariffs and NAFTA renegotiation has improved.
2. Corporate earnings were outstanding in the second quarter. Most companies have reported second quarter results, indicating the fastest EPS growth and the highest percentage of positive EPS surprises in seven years. Sales rose by 12 percent, and margins expanded to a record 11 percent.2
3. Inflation has been trending higher, moving from very low to low. Core inflation, measured by core CPI that excludes food and energy costs, accelerated in July to 2.4 percent year-over-year, which is the fastest growth in a decade.3
4. The political landscape remains in the balance. We believe the Democratic party will be successful in winning the House of Representatives and anticipate the Senate is likely to remain under Republican leadership. We also think the probability that the Democrats could claim both chambers of Congress is higher than the probability that the Republicans will continue to control both the House and Senate.