The standout stories for the summer so far have been strong U.S. economic growth and surging corporate profits. Although tariffs continue to grab headlines and may raise investor concern, it doesn’t appear that they have had a meaningful impact on the second quarter earnings season and, despite more volatility, it's quite possible to see further stock market gains over the balance of 2018.
Corporate profits are a key element of our stock forecast, so naturally it’s prudent to keep a close eye on the quarterly earnings reports. In addition, one of the big earnings stories so far in 2018 has been whether earnings have “peaked” and if we’ve seen the best results of this bull market. Although this may be true, what’s important to remember here is that earnings growth is still very strong.
Heading into this earnings season, consensus estimates were calling for another quarter of 20% or higher growth—which would also mark the eighth straight quarterly increase for earnings. Factors such as tax cuts, strong manufacturing activity, higher oil prices (supporting energy), and a lower U.S. dollar (compared with the year-ago quarter) are also supportive of earnings growth. The primary "watch-out" for corporate profits is the ongoing tension surrounding trade; although some companies are more affected by tariffs, this isn’t expected to impact overall results.
Turning to the U.S. economy, the Federal Reserve (Fed) summed it up well after its two-day policy meeting back on July 31 – August 1. “Economic activity has been rising at a strong rate,” the Fed’s statement said, thanks to strong consumer spending and business investment. The U.S. economy grew 4.1% in the second quarter to post its strongest quarter since the third quarter of 2014, with fiscal stimulus having a clear impact on consumer and business spending. As expected, the Fed also opted not to raise interest rates at its last meeting, and the market anticipates the next meeting in September will result in a rate increase.
The reports we’ve seen in the last month continue to support our expectations for continued economic growth. Fundamentals are solid and there don’t appear to be signs of a recession on the immediate horizon. A pickup in market volatility may be ahead, due to the ongoing trade negotiations, upcoming midterm elections, and possibly even the Fed; but it’s important to continue to focus on the fundamental factors that are driving this business cycle forward.
As always, if you have any questions, I encourage you to contact me.