Reasons for Optimism Slightly Outweigh Reasons for Caution
Corporate earnings were in focus for much of last week. Results continued to come in stronger than expected and earnings are on track for their best quarter since 2010. But concerns remain that earnings growth may have peaked in the current cycle. Investors also focused on economic data, including another drop in U.S. unemployment and indications that global growth momentum may be slowing. Amid these crosscurrents, stocks were mixed, with the S&P 500 Index dropping 0.2% for the week. Technology was a standout performer, while telecommunications and healthcare lagged.
Upside and Downside Risks May Result in Ongoing Volatility
We do not believe that we are close to the end of the current cycle of global economic expansion, but the endgame may develop more quickly than many investors expect. At this point, it appears that upside and downside risks for the economy and financial markets may be pretty well balanced.
- Earnings growth may be peaking with the strong first quarter results, but that does not mean the equity bull market is coming to an end.
- Volatility is likely to remain elevated as sentiment shifts between a focus on the positives and negatives.
- It may take time, but we think stocks will chart new record highs before this current economic cycle ends.
We Expect Stock Prices Will Break New Ground, but Maybe Not for Some Time
Overall, we remain broadly constructive about the long-term outlook for stocks given economic and earnings momentum, and expect equities will continue to outperform bonds over the coming year. Over the near-term, however, we expect markets will remain stuck in the same broad trading range they have been in since early February as sentiment moves between concerns about slowing growth and rising inflation to optimism about earnings. We think stocks will again break new ground and push higher, but it may yet be several months or longer before that happens.