- We believe economic fundamentals and corporate profits are strong enough to offset rising rate impact. The incremental economic impact of the roughly half-percent jump in the 10-year Treasury yield this year is likely to be more than offset by the impacts of the new tax law and other stimulus being put into the U.S. economy in 2018. That does not mean that the stock market volatility is behind us as investors digest a 3% 10-year yield they haven’t seen in four years. As we saw with the “taper tantrum” in 2013, equities adjusting to swift moves in rates can be an unpleasant experience for a short period of time; however, over longer periods historically, economic and profit growth win out. As long as Treasuries yields are relatively low (as they are today), stock prices and bond yields typically rise together. We expect this latest episode to be no different. For a look at how well stocks have done in rising interest rate periods, please see this week’s Weekly Market Commentary.
- We think it’s too early for peak earnings worries. Yesterday’s comments from industrial giant Caterpillar sparked concerns that earnings for the sector–and perhaps the broader market–may be peaking, a topic we discussed in a Weekly Market Commentary earlier this month. We believe these concerns are premature even if consensus estimates prove too high (as our below-consensus S&P 500 Index earnings estimate for 2018 suggests) and growth decelerates slightly over the balance of the year. The weakest quarterly increase reflected by consensus for any quarter this year is currently 19% (first quarter is tracking to 20%). When factoring in some modest margin pressure from rising input costs and wages–another concern that surfaced during some earnings reports this week–and removing the benefits from the cut in the corporate tax rate, we still expect the S&P 500 may deliver double-digit earnings growth this year on the back of solid economic growth. As we pointed out in this week’s Weekly Market Commentary, double-digit earnings growth has been accompanied by stock market gains for 12 consecutive years.
Monitoring the Week Ahead
- Durable Goods Orders (Mar)
- Germany: Consumer Confidence (May)
- UK: Consumer Confidence (Apr)
- BOJ: 10-Yr Yield Target
- Japan: Tokyo CPI (Apr)
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