Interest Rate and Trade Concerns Cast a Shadow Over Stocks

The S&P 500 index has traded in a narrow range for the past month, fluctuating between resistance at its 100-day moving average and support at its 200-day moving average, unable to establish any clear direction. The failure of stocks to push higher can be traced to a variety of concerns, including rising interest rates, trade tensions and signs of slowing global growth. At the same time, a strong first quarter earnings season has kept stocks from falling below their longer-term trend. The net result has been directionless trading, in search of a catalyst to break the stalemate.

We continue to believe that stocks can move higher, as economic growth accelerates from the modest first quarter and earnings growth remains strong, even though the rerating of earnings expectations following the passage of tax reform had been mostly discounted by the January rally. As it turns out, however, actual earnings this quarter are exceeding even those lofty expectations. According to Factset, by the end of March earnings expectations for the first quarter had risen to 17 percent. And as recently as last week, those expectations had edged higher to 18 percent. But now, after some better than expected results mostly from technology stocks, earnings are expected to grow by an astounding 23 percent. It seems unlikely that results that strong had been fully discounted by the January move, but that still has not been enough to pull stocks higher, suggesting that worries over trade and interest rates must recede to lift the cloud over stocks.

GDP and Inflation Ratchet Higher 

Last week we learned that GDP growth in the first quarter grew by an estimated 2.3 percent. And although that result continued the pattern of relatively weak performance to start the year, it was better than the 2.0 percent Bloomberg consensus. Improvements in both trade and inventories from the previous quarter were not enough to offset weakness in personal consumption, particularly in automobile sales. But compared to the 1.2 percent pace of growth in the first quarter of 2017, and 0.6 percent in 2016, this year’s performance looks rather healthy overall.

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