The US economic expansion is now the second-longest in the post-war period. At the end of April the US economy had grown for 107 months, surpassing the 1960's boom and second only to the 120-month long expansion in the 1990s. Yet the US stock market has made no progress this year, with the S&P 500 1% lower year to date. Equity markets have been unsettled by a series of potential tail risks this year, from US inflation concerns, fears of a trade war and renewed Middle East tensions.
But we believe investors will turn their focus back to economic fundamentals, which are supportive.
- The expansion has been a long one, but has room to run further. The Conference Board index of US leading economic indicators surpassed 2006’s previous cycle peak last year and has continued to make further gains each month this year. US consumer confidence is running at levels last seen in 2000.
- Solid economic expansion is underpinning the best quarter for corporate earnings growth since 2010. After 154 S&P 500 companies had reported first-quarter results, 81% had beaten earnings estimates by an average of 7%. Blended earnings growth is running at 22% year-on-year.
- Some tail risks have receded. The US has extended temporary exemptions on metals tariffs for the EU, Canada and Mexico and tentative agreements are reported to have already been reached with Argentina, Australia and Brazil. The Trump administration’s approach continues to be to threaten action first, and then negotiate. Talks have begun between North and South Korea on disarmament and denuclearization.
Political tensions are likely to continue to generate near-term volatility in equity markets. We hold counter-cyclical positions and downside protection through derivatives to protect against downside risks. Ultimately, we expect solid economic growth and robust earnings trends to push stock prices higher. We remain overweight global equities.
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