• Earnings growth may be peaking with the strong first quarter results, but that does not mean the equity bull market is coming to an end.

• Volatility is likely to remain elevated as sentiment shifts between a focus on the positives and negatives.

• It may take time, but we think stocks will chart new record highs before this current economic cycle ends.

Corporate earnings were in focus for much of last week. Results continued to come in stronger than expected and earnings are on track for their best quarter since 2010.1 But concerns remain that earnings growth may have peaked in the current cycle. Investors also focused on economic data, including another drop in U.S. unemployment and indications that global growth momentum may be slowing. Amid these crosscurrents, stocks were mixed, with the S&P 500 Index dropping 0.2 percent for the week.2 Technology was a standout performer, while telecommunications and health care lagged.2

Weekly Top Themes

1. The labor market continues to tighten. April’s headline payroll gain of 164,000 jobs was a bit weaker than expected, but unemployment fell to 3.9 percent, its lowest level since 2000.3 Average hourly earnings rose 0.1 percent, putting the year-over-year growth rate at 2.6 percent.3

2. First quarter earnings results continue to impress, helped by tax cuts. With 85 percent of companies reporting, earnings are ahead of expectations by an average of 7.3 percent.1 Earnings-per-share growth is on track for 25 percent.1 Were it not for the effects of tax cuts, that number would be only 18 percent.1

3. Even if earnings are peaking, that does not necessarily mean the equity bull market is ending. According to one study, since the 1950s, a cyclical peak in earnings growth has tended to be followed by stock prices moving higher: From a peak in earnings-per share growth, stock prices were still higher six months later 74 percent of the time and were higher 12 months later 68 percent of the time.4

4. Inflation should continue to rise slowly. Core CPI inflation is now close to the Fed’s two percent target after rising 50 basis points over the last six months.5 The current pace of economic growth implies inflation is likely to continue trending higher over the next year, although likely at a slower pace.

5. Headline trade risks have receded, but remain a potential issue. The recent U.S./China trade talks appeared to be generally cordial, but we have not seen any measurable progress. We think trade risks are likely to remain a consideration for markets for quite some time.

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