86% Of S&P 500 Firms Beat EPS Estimates

Global Earnings Estimates Looks Strong

The only thing that matters to stocks is earnings growth. That’s the bottom line when it comes to analyzing geopolitical issues or trade skirmishes. With amazing earnings coming out as the tariffs are implemented, the market is getting less worried about the possibility of a demise in growth. Some arguments such as the worries about the flattening yield curve and the peak in earnings growth were misnomers because stocks do well after earnings growth peaks and they do well when the curve goes from 50 basis points to an inversion. Tariffs only matter if they are much larger than what they are now.

The emerging markets are levered to the industrial sector and the dollar. With weakness in industrials and a rising dollar, they fell. The dollar has been stagnant for 6 weeks, so emerging markets may end this correction soon. There also appears to be some green shoots in the Japanese and European economies. China is still a concern. The chart below shows the MSCI world country earnings consensus for the next 12 months. Despite the woes in China and the worries about trade wars, the earnings consensus is positive which means stocks should rally.

(Click on image to enlarge)

4 Fed Rate Hikes In 2018

The better international markets do, the more likely the Fed will raise rates 4 times in 2018. In this case, the better the news is, the more hawkish the Fed is. Rate hikes pull the next recession closer. With the recent optimism in markets, the chance of 4 rate hikes has increased to 55.6%. Since the chances rise with the stock market, I would expect 4 rate hikes to be a sure bet if the market breaks new records. The yield curve doesn’t have to invert, but it probably will if this occurs. The reason I say it doesn’t have to invert is because the long maturity bond yields could rise. It’s not as simple as saying the curve will flatten by 50 basis points with 2 rate hikes.

S&P 500 Q2 Earnings Season Is Underway

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