Last week stocks enjoyed their best week since November 2018, boosted by increasing hopes of Federal Reserve (Fed) rate cuts.
Unfortunately, stocks may not be in the clear yet, as trade tensions with China linger. “While the agreement with Mexico over the weekend to avoid tariffs is helpful, the odds of a prolonged trade war with China have increased in recent weeks,” noted LPL Chief Investment Strategist John Lynch.
Whether companies pay the tariffs or shift supply chains to other countries to avoid them, profitability will be impacted. Lynch added, “Due to tariffs and ongoing trade uncertainty, and the related drag on business confidence and economic growth, LPL Research has reduced its 2019 S&P 500 Index earnings forecast from $172.50 per share to $170.”
As shown in the LPL Chart of the Day, “Reducing 2019 S&P 500 Earnings Forecasts,” this forecast is still above consensus estimates ($168 per share according to FactSet) and represents growth. We see upside potential to this forecast depending on the path of negotiations with China.
We remain optimistic that the trade dispute can be resolved this summer, though probably not until more economic pain is inflicted on both economies. Despite the slight reduction in estimates, we stand by our year-end S&P 500 fair value target of 3,000.
For more details on our change in earnings forecasts, check out this week’s Weekly Market Commentary.
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