US equity prices move higher despite trade headwinds

As I discussed on Yahoo Finance Market Movers last week, investors have once again shifted their collective attention away from relentless and schizophrenic geopolitical headlines. It even appears as though the fear of burgeoning trade wars and rising tariffs has had little impact on equity prices thus far in Q3. Since the beginning of July, investors have focused on the two principal drivers of equity market price discovery: earnings and economic data. In the process, equity markets have posted solid gains.

Q2 earnings continue to come in better than expected – by a wide margin. Though still relatively early on in this earnings season, of the S&P 500 companies that have reported results, nearly 75% have beaten consensus earnings expectations. With Q2 S&P 500 EPS growth currently coming in at 20.5%, and top-line growth coming in at 9.2%, that rising tide in the form of Q2 performance is lifting valuations and as a result equity prices.

Equity investors are also continuing to benefit from healthy and seemingly sustainable economic expansion. Retail sales data for June and May (revised), released last week are a case in point. On a month-over-month (M/M) basis, both retail sales and retail sales less autos hit very constructive consensus: 0.5% and 0.4%, respectively. May’s results in both categories were revised significantly higher: from 0.8% to 1.3%, and from 0.9% to 1.4%.

The Federal Reserve’s monthly index of industrial production for June was also solid, coming in at 0.6% versus May’s revised negative 0.5% reading. Weekly jobless claims continue to astound. Last week’s figures (207K) were both well below consensus of 220K and lower than the previous week’s 215K.

Consumer confidence, business optimism, and nearly every measure of economic outlook all remain at multi-year highs.

For the S&P 500, 2800 has been resistance in recent months. Last week it closed above that technical level on Tuesday and managed to remain above it into the close on Friday – closing the week at 2,801.83. The stage is set for additional gains, with 2,800 acting as support if, as expected, earnings season moving forward continues to deliver significantly better than expected Q2 results.

Without question, the Q2 GDP Q/Q change – SAAR release is the most important economic data of the week ahead. It will be released on Friday at 8:30 am. Econoday consensus is 4.2%, up significantly from Q1’s 2.0%. The consensus is also expecting Real Consumer Spending Q/Q to lurch higher as well, from Q1’s 0.9% to 2.9%. Importantly, the GDP price index is expected to remain flat versus Q1’s 2.2%. In summary, the economy is expected to have grown nearly double the rate of inflation in Q2.

An accelerating GDP; contained/in-channel inflation, solid economic data across the board, a re-engaged equity market rally, multi-decade low levels of joblessness and unemployment, historic low levels of unemployment among minorities, and a 26th consecutive quarter of EPS outperformance relative to the previous quarter-end estimates, all add up to a move higher for US equities. My quarter-end call for a gain of 5%-8% in the second half of 2018 remains.

Flickr photo: Dean Hochman

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