Mike Gibbs, Managing Director of Equity Portfolio & Technical Strategy, discusses tariff tensions and equity market conditions.
Trade tensions have intensified over the past couple of weeks, following the U.S. administration’s decision to levy $50 billion of tariffs on China, China’s decision to retaliate, and the U.S.’s follow-up threat of an additional $200 billion in Chinese products to target with 10% tariffs. Elsewhere, the U.S. remains in ongoing negotiations with the European Union and North American Free Trade Agreement. It has been this administration’s tactic to apply maximum pressure in pursuit of a grand bargain, and it appears the president is expected to invoke the International Emergency Economic Powers Act to implement new restrictions directed at China.
While the back and forth on global trade can obviously impact short-term volatility (especially considering the front-page nature of these discussions), we continue to believe that this is part of a negotiation process and that the odds of a full-scale escalation “trade war” remain low.
U.S. economic activity and earnings growth remain supportive of equity markets. The second quarter ends this week and the corresponding earnings season will begin soon. S&P 500 estimates for the quarter have trended slightly higher since the end of a very strong first quarter earnings season and now reflect sales growth of 8.4% and earnings growth of 20.2%. Margin estimates have held steady at the highest levels in over 15 years.
Despite stellar fundamentals, we still remain comfortable with our short-term base case trading range for the S&P 500 near ~2600-2800 due to the headwinds/concerns surrounding trade negotiations, interest rates, global economic momentum, and rising input costs. The index is currently near the mid-range following its sharp selloff Monday, June 25, and is able to hold its 50-day moving average for now.
All expressions of opinion reflect the judgment of Raymond James & Associates, Inc., and are subject to change. There is no assurance any of the trends mentioned will continue or that any of the forecasts mentioned will occur. Economic and market conditions are subject to change. Legislative and regulatory agendas are subject to change at the discretion of leadership or as dictated by events. Past performance may not be indicative of future results.
