The bull story for the rest of the year remains in place as trade war angst ebbs, the stimulative effect from lower rates kicks in, the US consumer remains resilient and credit markets show money is still available. The S&P 500 could rally another 3-5% as long as we don’t see a policy mistake by the Fed and a complete collapse in trade war.
As we approach earnings season, the consensus is likely to see stocks deliver hardly any earnings growth over the next 12 months, with a strong economic recovery seeing 12% gains, and recession led collapse seeing 15% drop. With the trade war lingering longer than most have expected, business investment is continued to remain stagnant. If we start to see a lot of pre-announcements over the next couple of weeks, we could see limited downside with US equities.
Over the past several trading days, cyclicals have been playing catchup as banks, retail, transports and energy all rallied strongly. They key to the next leg higher will depend on industrials and technology, thus re-emphaszing the importance of a substantial de-escalation in tariffs or even an interim trade deal.