After being down four consecutive weeks, the S&P 500 Index bounced impressively the past two weeks and is now within 3% of new all-time highs. LPL strategists discuss the continued concerns with China, questions about Federal Reserve (Fed) policy, and the global slowdown that is showing no signs of ending. As a result, we have lowered our overall 2019 S&P 500 earnings per share (EPS) forecast, but maintain a fair value target of 3,000 on the S&P 500.
Domestic Economic Data
Some bits of economic data last week added to the worries. In the August jobs report, nonfarm payrolls came in at 130,000, beneath the expectations of 160,000; however, average hourly earnings are still healthy. Overall, the employment picture is healthy, and U.S. consumer spending is strong. Meanwhile, U.S. manufacturing contracted in August for the first time since January 2016 as trade uncertainty continued to weigh on the sector. The Institute for Supply Management’s (ISM) manufacturing Purchasing Managers’ Index (PMI) fell to 49.1 versus consensus expectations of 51.3, a meaningful decline from July’s 51.2 reading (above 50 is considered expansionary territory). Globally manufacturing has slowed, and the U.S. is experiencing this phenomenon as well.
The European Central Bank (ECB) is set to announce a new stimulus package at its meeting later this week, which could pressure the Fed next week. Europe continues to show signs of slowing, and extra stimulus is expected to increase growth. Turning to China, Vice Premier Liu will come to Washington, D.C., in early October for high-level trade talks. Although we don’t expect a major breakthrough at this meeting, it could lay the ground work for a resolution sometimes early next year.
The LPL strategists discuss their reduced 2019 S&P 500 EPS forecast that reflects increased risk to economic growth and corporate profits from the ongoing trade conflict between the United States and China. Although we continue to expect resolution later this year or in early 2020, the odds of a more prolonged dispute have risen. As a result, we believe it is prudent to be somewhat conservative in our forecasts until we get more clarity on trade.
Second quarter earnings season is wrapping up, and S&P 500 Index EPS managed to eke out a minor gain. In general 2019 earnings have been depressed due to the continued trade conflict with China. Overall slower growth has hampered revenue, while business uncertainty around future capital expenditures has also negatively impacted overall EPS growth in 2019.
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