Highlights
• Strong economic growth and stellar corporate earnings continue to provide reasons for investors to bid stock prices higher.
• Trade tensions eased a bit last week, but uncertainty over policy is keeping financial markets in check.
• We expect the equity market to maintain its current trading range until trade tensions ease.
Investors focused last week on a moderate easing of trade tensions and a solid second quarter gross domestic product report. Corporate earnings also drew headlines, particularly troubled results that ravaged Facebook’s stock price. U.S. indices were mixed, although the S&P 500 Index posted a fourth weekly gain, rising 0.6 percent1 The energy, industrials and financial sectors were the best-performing areas, while technology and consumer discretionary came under pressure.1
Weekly Top Themes
1. The second quarter GDP report was the strongest in years, although it may represent a peak for 2018 and the rest of the economic cycle. While headlines focused on real GDP numbers, we think nominal growth (which includes inflation) better represents overall economic activity. Nominal growth surged 7.4 percent for the quarter (the highest number in four years) and was up 5.4 percent year-over-year (the strongest pace of the current cycle).2
2. Corporate earnings are headed for another strong quarter. Growth estimates are surging and earnings-per-share growth could reach 25 percent or higher, which would exceed first quarter results.1
3. No real news is expected at this week’s Federal Reserve meeting, but monetary policy is growing less certain. The economic and political backdrop is murkier today than it has been in years. Central bankers have expressed concern about rising trade tensions, climbing inflation, the flattening of the yield curve and growing political pressures. All of these factors could impact future monetary policy.
4. Trade tensions eased a bit last week. The meeting between United States and European Union officials resulted in avoiding automobile tariffs, which is certainly good news. Additionally, NAFTA negotiations have restarted and a new deal could be reached before Labor Day. President Trump appears to be trying to ease tensions with many trading partners to gain support for a harder line against China.