Headline Risk Hides the Positives
The long bull market in equities ran into stiff resistance in February, when the S&P 500 Index experienced its first correction in two years. Since then, volatility has been elevated, driven by four ongoing risks: inflation, tightening monetary policy, big-tech headwinds, and trade protectionism.
The news headlines certainly haven’t inspired confidence – especially those headlines pertaining to trade, as China has swiftly responded to each trade law signed by the White House. We’ve discussed the dangers of an escalating trade war at length, and to reiterate, thus far, the tariffs today are limited in their economic impact, and a global trade war seems very unlikely. It’s more reasonable that tariffs represent a broader strategy to challenge China.
More importantly, the U.S. and global economies remain on very solid footing, and are unlikely to be derailed by these headlines. Businesses are investing in both people and equipment, auto sales picked up the pace in March, and consumer spending shows positive momentum. In sum, earnings prospects are bright, and will remain a tailwind for the equity market.
S&P 500: Change in Earnings vs. Change in Price (October 2017 – March 2018)
Sources: Thomson Reuters Datastream, New York Life Investments, as of 3/31/18. Past performance is no guarantee of future results, which will vary. You cannot invest directly in an index.
Equity markets will likely remain volatile in the near run, as investors absorb headline risks. But, with the Q1 earnings season underway, we feel optimistic. The estimated earnings growth rate is 17.3%, which will mark the highest earnings growth since Q1 2011. Higher earnings like this will confirm that valuations are at a more reasonable level.
It could take some time before the dust settles, but afterward, we expect equities to resume their advance – finding new highs later this year.
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