I am writing this newsletter early Tuesday morning, so it won’t include the action of the Federal Reserve (FED) in their meeting on interest rates which is taking place as I write this. Expectations are for a cut in the Fed Funds rate, but nothing is certain these days. The equity markets rose in the last two weeks due to the perception that interest rates will decline and that the trade tensions with China have softened a little as a date is set for meeting with the Chinese and a delay in the Tariffs we charge has also occurred.

We will see. LPL Research is lowering its earnings growth forecast for the S&P 500 Index due to increased risk to economic growth and corporate profits from the ongoing trade conflict between the United States and China. The revised S&P 500 Earnings Per Share (EPS) forecast is now $165 for 2019, when LPL’s initial forecast 2020 was for $175. LPL Research has maintained a year-end fair market value target on the S&P 500 of 3,000, as they expect lower interest rates and inflation to support higher valuations. The S&P 500 is currently trading at 2997.70.

Another reason for the equity markets trading close to their all-time highs is the lessoning of recession fears that we were feeling a month or two ago. Now that second quarter earnings season is completed, it looks like earnings are still growing and the likelihood of a recession at this time has lessened. There are hiccups of course. Boeing’s multi-billion charge during the second quarter detracted 1.5% from S&P 500 EPS by itself. But it appears to be a unique event that shouldn’t recur.

Overall, LPL research thinks corporate America has done a good job of delivering modest earnings gains amid headwinds of tariffs and trade uncertainty. Also challenging is slowing growth in Europe and Japan and a strong U.S. Dollar. Roughly 40% of S&P 500 profits are generated overseas and are sensitive to global trade, international economies, and foreign exchange markets.

So, as usual, we are in a bit of a mixed bag. Recession fears have lessened, but earnings are slowing a little and interest rates continue to compress. LPL believes a trade resolution will occur later this year or early 2020, but the odds of a more prolonged dispute have risen. Many investors do not understand how the trade conflict weighs on corporate earnings. Slower economic growth hampers revenue, while paying tariffs and dealing with supply chain disruptions hurt profit margins. In addition, business uncertainty around future trade actions weighs on capital investments, which limits opportunities for companies to grow their revenue. If there are any changes to these projections by LPL Research, we will be sure to make you aware of them in future newsletters. Our weather in Reno has been changing – we wish you a pleasant fall season coming our way – Mark

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. No strategy assures success or protects against loss. Economic forecasts may not develop as predicted. Some of this research material has been prepared by LPL Financial. All indices are unmanaged and may not be invested into directly. Referenced material: LPL Research Weekly Market Commentary dated August 19, 2019 and September 9, 2019.  Approved Tracking #:  1-894544.