5. Republican’s prospects for the midterm elections appear to have improved this week. The GOP nominated mainstream and competitive candidates for several key races in the fall, most notably in the West Virginia and Indiana Senate races that feature vulnerable Democratic incumbents. We think it is likely that Democrats will capture the House of Representatives this fall, but think the Senate should remain in Republican hands.
The Current Economic Expansion Should Continue, Helping Corporate Earnings And Equity Prices
Softness in first quarter economic data has led to fears that the economic expansion may be coming to an end, but we think such concerns are premature. We see few signs that suggest an end to the current cycle, either in the United States or around the world. Indications of an escalating trade war have eased, although it is certainly possible that trade rhetoric could again heat up before more agreements between the U.S. and China are reached.
The tightening labor market and rising inflation levels are likely to put additional pressure on the Federal Reserve to continue increasing interest rates. But the Fed has been clear that it will raise rates gradually, and current policy does not appear close to the level that would jeopardize the economic expansion.
Given this backdrop, we expect the environment for corporate earnings will remain positive. The pace of earnings growth may slow from incredibly strong levels reached in the first quarter, but we expect results will be strong enough to limit downside equity risk as investors contend with positive and negative crosscurrents. Accordingly, at some point we expect equity markets will break out of their current trading range to the upside.
Bob Doll is chief equity strategist at Nuveen Asset Management.
1 Source: Morningstar Direct, Bloomberg and FactSet
2 Source: Labor Department