Macro View

Daily Insights

  • We have raised our 2018 S&P 500 earnings forecast.The solid profits backdrop led us to increase our S&P 500 Index earnings forecast for 2018–from $152.50 per share to $155–in our Midyear Outlook 2018: The Plot Thickenspublication. While this forecast may prove to be conservative, we prefer to be below consensus, which is around $160, due to the potential for further U.S. dollar strength, wage pressures, and tariff-related costs. A target price-to-earnings ratio of 19 gets us to our year-end fair value target range for the S&P 500 of 2900-3000, representing a potential double-digit return for the year. Through July 11, the S&P 500 has returned 4.8% year to date.
  • Global expansion to continue. As noted in our just-released Midyear Outlook 2018: The Plot Thickens, we forecast 3.8% gross domestic product growth for the world economy this year, thanks to new fiscal policies and improved business vitality. We continue to expect the U.S. economy to remain a primary driver, aided by the anticipated higher growth trajectory of emerging markets (EM), supporting our continued preference for U.S. and EM equities over international developed markets which may lag. Primary risks to our global and U.S. economic forecasts include an unexpected pickup in inflation, a substantial increase in trade friction, or a policy mistake.
  • Sustainable growth trajectory for EM. Emerging economies still appear to have a more sustainable growth trajectory than their developed international counterparts. Though tariffs and the potential for a trade war with China have weighed on EM sentiment, we don’t expect these factors to derail their growth trajectory. We continue to expect the U.S. and China will successfully navigate trade issues and ultimately reach an agreement, particularly once the crucial intellectual property policy issues are addressed. We expect that the powerful demand trajectory driven by six billion EM consumers, along with innovative businesses embracing dynamic global output changes, should result in EM economic growth approaching 5.0% in 2018.
  • U.S. and China talks coming? Chinese officials appeared to strike a more conciliatory tone overnight with regard to pursuing trade talks. Though we have heard this before, and there is no clear path to a deal at this point, the headlines have been enough to drive stocks solidly higher this morning, particularly in Asia.
  • IEA warns OPEC output may be stretched. The International Energy Agency (IEA) warned that OPEC global oil capacity is constrained, providing further evidence that global oil markets are generally balanced. Some of the production disruptions are temporary, however, providing a counter-balance to higher prices. We expect domestic oil prices to be range-bound near term and maintain a neutral energy sector view.
  • Consumer prices grow for a fifth consecutive month.The consumer price index (CPI) increased 2.9% year over year in June, matching consensus estimates and marking the fifth straight monthly rise. Core CPI (which strips out food and energy prices) rose 2.3% year over year last month. Today’s CPI reports confirms yesterday’s strong producer price index (PPI) reading, which showed that producer prices rose 3.4% year over year in June, the strongest gain since November 2011. The core personal consumption expenditures index (core PCE) touched 2.0% in May, matching the Federal Reserve’s target for its preferred inflation gauge. As mentioned in the Midyear Outlook, we expect U.S. inflation to pick up gradually this year amid a tightening labor market, with the CPI finishing 2018 between 2.25%-2.5%. So far this year, CPI growth has averaged 2.5% year over year.
  • Jobless claims below estimates. New applications for unemployment benefits dropped last week to 214,000, below consensus estimates of 225,000. The four-week average for jobless claims slid to 223,000 from 225,000 last week, showing that the labor market continues to tighten as it sits at or near full employment.

Monitoring the Week Ahead

Click Here for our detailed Weekly Economic Calendar

Thursday

  • CPI MoM (Jun)
  • Monthly Budget Statement (Jun)
  • Germany: CPI (Jun)
  • France: CPI (Jun)
  • Eurozone: Industrial Production (May)

Friday

  • Import Price Index MoM (Jun)
  • Japan: Industrial Production (May)

 

IMPORTANT DISCLOSURES

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. The economic forecasts set forth in this material may not develop as predicted.

All indexes are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment.

All performance referenced is historical and is no guarantee of future results.

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