Economic and Stock Market Commentary for the week of July 31, 2018

Alex Ralicki |
Categories

Earnings reports were still flowing in as July ended and August began. In general, the results have exceeded expectations. True, there have been shortfalls (and a few from high-profile companies), and in some cases, there has been disappointing guidance given for the coming quarters. Overall, though, the news has been favorable, as more than 80% of the S&P 500 companies that already have reported have topped consensus forecasts. In all, we think earnings will show gains of more than 20% in the current reporting season, thereby surpassing already high expectations. Strong demand—fostered by a healthy business backdrop—and more industry-friendly tax treatment are behind the surging bottom lines. Meanwhile,

The economy is on a fast track as the summer moves along, with reports on consumer spending, the leading indicators, and jobless claims (which recently fell to their lowest level since 1969) more than offsetting some recent slippage in housing. In all, these gains point to a business upturn that should continue pressing forward at a healthy pace over the summer and into the fall. The expansion’s durability should lead to continued positive earnings news down the stretch this year.

So, why is the stock market making only modest strides this year? One likely explanation is that with equities at or near all-time highs, much of the upbeat economic and profit news is already baked into the market. But it’s also true that along with a growing economy and solid earnings, Wall Street still is dealing with a worsening trade rift with China (as tensions seemingly ease with the European Union) and the likelihood that the Federal Reserve, acknowledging the increasing strength of the economic expansion, will raise interest rates twice more this year. Meantime,

We think things will continue as before, with the above issues likely keeping stocks range-bound in the short run. Our sense is that it would take a major shift on the trade, monetary, political, or economic fronts to dramatically alter the market’s second-half course.

Conclusion: We think keeping a steady hand on the wheel is wise for now, with investors pointing to solid earnings and supportable P/E ratios as justification for sticking with stocks.

Source: Valueline.com