Tariff threats among the US, China, and Mexico continue to dominate the headlines. However, there was some good news over the weekend. The US president announced a deal with Mexico to avoid tariffs on Mexican goods in exchange for immigration enforcement measures.
The outlook remains muddled regarding China. More economic pain may be inflicted on both China and the US. That pain could eventually result in a trade agreement, according to the LPL strategists, possibly by the end of the summer. The next key event to watch is the G-20 Summit at the end of June. The presidents of the US and China are expected to meet, although Chinese leaders have not confirmed that meeting.
Reduced Earnings Forecast
Due to the drawn-out trade uncertainty and subsequent drag on business confidence and economic growth, LPL Research reduced its 2019 S&P 500 Index earnings forecast from $172.50 per share to $170. That is still above consensus estimates. And in the strategists’ view, the economic data hasn’t deteriorated enough to warrant a Fed rate.
Fed Intervention Possible
Trade uncertainty remains a primary risk to an otherwise solid economic outlook. There have been signs that economic growth could slow over the coming quarters. The bond market has signaled increasingly that the current monetary policy may be too tight for an economy hampered by a drawn-out trade dispute. According to the LPL strategists, at some point the Fed may have to intervene by lowering interest rates.
As the chart shows, LPL Research’s forecast is still above consensus estimates ($168 per share according to FactSet) and represents growth. The strategists see upside potential to this forecast depending on the path of negotiations with China.
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