5) Corporate earnings remain strong, but growth is set to slow. Third quarter earnings are on trend to show slower growth than the first half of the year, but we expect they will still be up more than 20 percent.1 Forward guidance from companies suggest management teams are growing more concerned about trade issues, as well as factors associated with the aging economic cycle: rising interest rates, higher wage costs, transportation cost pressures and the stronger dollar.

6) Earnings growth may disappoint in 2019. Consensus expectations call for double-digit growth levels next year, but we expect approximately 6 percent due to the issues we just cited.1

7) Downward pressure in the financial sector could persist. Since the start of earnings season, this area of the market has declined significantly.1 Higher rates are causing tighter lending conditions, while a flatter yield curve has put pressure on margins.

8) We believe the U.S. stock market is approaching a bottom. We don’t think we have yet seen the sort of investor capitulation usually associated with the end of corrections, but we may be getting close. Rallies have been short-lived and narrow in scope, but we believe that may start to change if sentiment bottoms.

9) We may have seen the market highs for the year, but we also expect the bull market to continue. Our best guess is that the record highs established in early October will have marked the high point for 2018. But we also believe there is a more than 50 percent probability that markets will reach new records before the bull market is over.

10) History suggests the post-midterm-elections period could be good. Since 1950, U.S. stocks have never experienced a price decline in the 12 months following a midterm election.4 And the average price gain for the S&P 500 Index has been 15.3 percent.4

Market Conditions Have Become More Complicated In Recent Months

Around Labor Day, investors were generally sanguine, and volatility was low. Now, stock markets are in correction territory. What changed? A long list: a worsening U.S. political backdrop; slowing global growth; rising inflation; higher interest rates; peaking corporate earnings and, of course, a potential trade war.

These issues are real, but we also think equity market action is typical of an aging economic cycle. We believe sentiment is worse than reality. An escalating trade war could significantly slow global growth. A related risk is the degree to which corporate earnings growth slows, both as a result of these fears and fundamental declines associated with the aging economic cycle. But we do not see imminent risks of a recession or an end to the equity bull market—at least not over the next 12 months.

Volatility May Remain Elevated, But Stock Prices Should Rise Over The Next Year