Stock Market Update: Have We Reached Cruising Altitude Yet?

stock market prices as corporate earnings decline

The rapid increase in EPS growth driven by tax reform is not sustainable


What a Round Trip it has Been! Since the tax bill passed in December 2017, the return on the stock market has been ABSOLUTELY ZERO! What we gained in tax breaks we lost in trade wars. Except that now the bill is due with $1.8 trillion in new government borrowing this year. Oops! That is NOT what they promised. John Thomas

And although the market doesn’t seem to care right now, at some point it will.

MORGAN STANLEY CUTS BASE CASE 2019 S&P 500 EPS GROWTH FORECAST TO 1 PCT FROM 4.3 PCT.

Slowing global growth should mean slowing revenue growth. So while stock prices have and can continue to recover, important underlying fundamentals could start to reflect the fears that drove the first panic selling in early 2018 and again in late 2018.

US Dollar Strength

Last week I noted that with the USD strength it was a surprise the Euro was not trading lower. By Monday, the Euro had decisively broken $1.13 as the DXY has risen 8 days in a row. And it’s no wonder: Italy is in recession. Germany is sliding into recession. France is struggling with YellowVest protesters. The rate of change on a major asset class, like US dollars, can be a Big Tell for an inflection point for equities. Remember late 2014 through March 2015 when the US dollar had one if its strongest 6-month periods while earnings fell steadily. Right now, this USD advance is the strongest in 2 yrs just as China comes back online to discuss trade tariffs; Gold and Crude struggle to hold critical support; not to mention the revision estimates to earnings falling off a cliff.

If Brexit would get resolved and a China trade agreement would get inked, I could see some relative strength evolving for non-US currencies. Also with the Fed done for a while, thus alleviating the “real rate of interest” differential with foreign countries, that could be another reason for the dollar to weaken. – Brian Gilmartin

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