Blog: You, us, everyone

On the back of a potential quarter percent rate cut, the S&P 500 closed at another record high on 26.07.2019.

Market sentiment isn’t just driven by the interest rate direction, but corporate fundamentals do guide to market too. In fact, company earnings outlook is clearly bottom up, while the interest rate outlook is top-down. With the second-quarter earnings season now halfway through, we retain the following:

·         Overall S&P 500 earnings growth for the quarter is below previous forecasts, most of which is due to Boeing's 737 Max grounding. Earnings growth for the median company in the S&P 500 is on pace to be just over 4%. Sixty-nine percent of companies are beating earnings forecasts, and by a wider margin than average.

·         US consumer spending grew at a 4.3% real annualized rate in 2Q and is consistent with comments from the banks and results from large consumer companies such as Coca-Cola, Starbucks, and McDonald's. E-commerce, internet advertising, enterprise IT spending, and aerospace also remain solid. Finally, there are some indications that global oil and gas spending is picking up.

·         After a speedy 2018, Semiconductors are exposed now to a mature market.

·         We see also mature market conditions for automobiles sales (new car sales as well as second hand), this is generating a larger impact throughout the divers supply chains – remember that about 1/3 of the global GDP is related to the automobile industry.

For now, earnings growth is sluggish, but we expect trends to improve based on supportive leading indicators: favorable access to capital, very low new claims for unemployment insurance, and a recent improvement in capital goods orders to a new high. Also, the negative base effect this year from the 2018 fiscal stimulus and the lagged impact of prior Fed rate hikes, which are likely weighing on results, will begin to dissipate, especially in 2020.

For 2019 and 2020, we continue to expect S&P 500 earnings growth of 1% and 7%, respectively. The expected reacceleration in earnings growth should support further market gains, and we are overweight US stocks. But we expect second-half returns to be lower than in the first half.