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.