Good morning,

What’s in this week’s Report:

  • Momentum Indicator Update
  • Yellen’s Humphrey-Hawkins Testimony
  • Weekly Economic Cheat Sheet
  • Political Update
  • Earnings Season Preview
  • EIA Analysis and Oil Update

Futures are flat to slightly lower after strong Chinese economic data bolstered Asian shares but soft inflation data in the eurozone is weighing on EU markets this morning.

There was a slew of Chinese data out o/n but the most notable print was the 6.9% (vs. E: 6.8%) headline to the Q2 GDP release, the latest sign that the economy is stabilizing.

In Europe however, inflation remains subdued as the final June HICP number met expectations at 1.3% which is the latest release to undermine the reflation trade argument.

As we start the trading week, there is one economic report to watch: Empire State Manufacturing Index (E: 15.0), and there are no Fed officials scheduled to speak. That will leave market focus on earnings as well as any developments out of Washington.




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S&P 500 Futures




U.S. Dollar (DXY)












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S&P 500 – Stocks

This Week

Earnings and the ECB will be the key events for markets this week. Starting with the latter, remember that German bunds have been a leading indicator for US Treasuries and (inversely) US stocks since mid-June. So, while it’s not expected, if Draghi is hawkish on Thursday at the ECB meeting, that will send bund yields higher… and, likely, stocks lower.

Turning to earnings, it’s a very busy week. We get a good mix of financials, industrials and consumer staples, but the companies I’ll be watching very closely are the credit card issuers. The sector remains the best barometer of consumer spending, and if we are seeing a dip in consumer spending, their earnings should show it.

That means AXP (Wed.), COF (Thurs.) and V (Fri.) are three key reports I’ll be watching this week. Other notable reports include: BLK/JBHT/NFLX (Mon.), BAC/GS/JNJ/UNH/CSX/IBM (Tues.), MS/QCOM (Wed.), EBAY/MSFT (Thurs.) and GE/HON (Fri.).

Last Week (Needed Context as We Start a New Week)

Stocks powered higher, and traded to all-time highs last week thanks to dovishly interpreted comments from Fed Chair Yellen, and a decline in bond yields following disappointing economic data. The S&P 500 rose 1.41%.

Stocks started last week quietly, as markets were little changed Monday and Tuesday. The only notable news from those two days was the Donald Trump Jr. Russia emails, which caused a mild dip Tuesday. While that adds to the political drama, it’s not an important event for markets, and stocks recouped those initial losses.

Equities surged on Wednesday, however, following dovishly interpreted comments from Fed Chair Yellen at her semi-annual Humphrey Hawkins testimony. Stocks gapped higher at the open Wednesday, and then held the gains for the remainder of the session, with the S&P 500 posting a 0.8% win.

Stocks added to the gains Thursday, enjoying a modest bounce (+0.19%) as markets ignored a rise in bund and Treasury yields. The rally continued Friday following a decline in bond yields after the lackluster CPI report, and outright bad Retail Sales data.

Stocks notched small gains Friday morning as soft economic data was offset by solid earnings. The S&P 500 edged cautiously higher in the morning, but broke out to new highs going into the lunch hour. The index proceeded to melt higher into the afternoon before closing just off the highs, up 0.47%.

Your Need to Know

Tech surged last week as soft inflation and economic data caused a rotation back into FDN and SOXX, and those sectors powered the Nasdaq to 2.6% gains. FDN and SOXX both jumped about 4% each. From a momentum standpoint, FDN hit new all-time highs, although SOXX still sits below the 2017 highs.

With tech surging thanks to soft data and lower bond yields, banks underperformed. BKX fell 0.9%, but given the data last week and the recent run up, it could have been a lot worse. Bank earnings on Friday were overall good, and that helped the sector weather lower bond yields. Going forward, BKX holding support at 95.00, and then 91.54, is important if the “reflation trade” is going to reassert itself in the weeks ahead.

Outside of tech and banks, retail was the only other notable sector as it bounced back thanks to positive TGT guidance. RTH climbed 1% last week on the news, but at this point we’d need much more positive evidence in retail before even thinking about catching a falling knife.

Bottom Line

Reflation or stagnation?

That’s been the key question for this market since early June, and unfortunately the soft inflation and economic data from last week left the question largely unanswered. It’s a pretty important question, because it will have significant implications on sector performance, as we’ve already seen in 2017.

Stagnation, which is lower Treasury yields, slow growth, declining inflation and super-cap tech and defensive sector outperformance; dominated the markets up to June. Since June, however, “reflation,” which is characterized by better growth, higher yields, higher inflation and cyclical sector outperformance, has led.

More specifically, this reflation vs. stagnation battle can be boiled down to tech vs. banks. Up to June, tech handily outperformed as economic stagnation was evident. In June, banks outperformed as hints of reflation emerged.

Which sector “wins” is important in the short and long term. In the short term, getting the tech vs. banks allocation right will have a huge influence on near-term performance, as the performance gap between those two sectors is significant in 2017.

Longer term, though, we should all be rooting for banks, as that signals an economic reflation, higher rates, higher inflation and a growing and healthy economy.

Last week’s events, (Yellen testimony, the soft CPI and Retail Sales) didn’t kill the reflation trade (bond yields help up relatively well), but it did injure it.

Still, I am going to hold the small allocations I made to our reflation basket (KRE/KBE/XLI/IWM/TBT/TBF) through this weakness, and resist the urge to chase super-cap tech (FDN) here.

Beyond banks and tech, the outlook for healthcare (XLV, IHF, IBB), Europe (HEDJ, EZU) and emerging markets (IEMG) remains positive, and they are offering sector-specific positives that help insulate them from the reflation vs. stagnation debate. I remain positive on all those sectors.

From a macro-risk standpoint, slower economic growth, if it continues, is a problem. That’s because the world’s central banks are becoming less dovish (see Bank of Canada last week). Beyond the near term, this trend of middling data is long-term concerning, although it’ll take a bigger drop in economic activity or a bad earnings season for investors to notice. Longer term, if data doesn’t get better, the outlook will start to darken. For now, the trend in stocks remains higher, and the focus is on outperforming and allocating to the “right” sectors… and that’s where our focus remains.

Economic Data (What You Need to Know in Plain English)

Need to Know Econ from Last Week

Hard economic data continued to disappoint last week, as both inflation and economic growth statistics were a letdown. And while in the short term the markets embraced it, as it potentially makes the Fed less hawkish, longer term this is potential problem as we need economic acceleration and higher inflation to power stocks materially higher.

Friday’s CPI report was the focus last week, as inflation has consistently been losing momentum since early 2017, and unfortunately that trend continued in June. Core CPI, which is the important metric in the report, rose 0.1% vs. (E) 0.2%, and 1.7% yoy. That continued a now four-month slowing of inflation, and unless this changes in the next month or two, it could alter expected Fed policy.

Specifically, while Friday’s disappointing data prompted calls from analysts to say the Fed won’t hike rates or reduce the balance sheet in September, we think that is premature. I believe it would take a material slowing of economic growth to cause the Fed not to start shrinking the balance sheet, and that is not what happened last week. With regards to rate hikes, if the inflation data doesn’t get better between now and October, then yes, the Fed will probably be on hold for a while. But, there’s a lot of time between now and October (think about how much changed during this period last year, when economic growth accelerated).

Looking at the other data last week, June Retail Sales was easily the most disappointing report. The “control” group (which is the key metric in the report, and reflects Retail Sales minus gas, autos and building materials) dropped to -0.1% vs. (E) 0.4%, and that is a potentially cautious signal for consumer spending.

Finally, Industrial Production looked like the one decent number last week, as the headline beat estimates at 0.4% vs. (E) 0.1%. However, it was a bump in mining activity that caused the headline to surge, and the more important manufacturing sub component just met expectations at 0.2%. Bottom line, last week’s data was a disappointment, and further confirmed the unsustainably wide gap between “hard” economic numbers and “soft” economic surveys (like the manufacturing PMIs), and that gap must be filled one way or the other.

From a market standpoint, in the short term the data will have a dovish effect. Longer term, this middling data is a threat. With global central banks becoming less dovish, economic growth must accelerate, and in the US that isn’t happening. Long term, that’s a problem for stocks.

Important Economic Data This Week

There are several notable economic reports out this week, including first looks at July economic activity, as well as the ECB meeting. But unless there are major surprises, the data shouldn’t really move the debate about reflation vs. stagnation.

The headline event this week is the ECB meeting, which comes Thursday. Other than parsing Draghi’s comments for hawkish or dovish hints, there shouldn’t be any surprises at this meeting. For the ECB, the outlook is they will announce tapering of the QE program at the September meeting, and that by mid-2018, ECB QE will be over. Nothing Thursday should change that expectation.

Looking at US data, we get our first look at July activity via the Empire Manufacturing Survey (today) and the Philly Fed Survey (Thursday). While anecdotally notable, both surveys haven’t been well correlated to the national manufacturing PMIs lately, and as such they aren’t likely to elicit much of a market reaction barring a big surprise.

Bottom line, this week’s economic events will give us more anecdotal insight into the current state of the economy, but really, it’s next week’s data (flash manufacturing PMIs) that’s the next potential market mover.

Commodities, Currencies & Bonds

In Commodities, the segment was mostly higher last week as precious metals rallied with Treasuries and soft economic data. Industrial metals rose with risk-on money flows while energy rebounded. The commodity ETF, DBC, gained 1.96%.

Gold has been in focus since breaking key support after the mostly solid June jobs report. Last week, soft data (specifically on Friday) helped gold rebound as Treasuries rallied and the yield curve flattened. Gold futures gained 1.33%. Looking ahead, last week’s rally was a rebound in an otherwise downward trending market. After the violation of key support in the 2017 rally at the $1220 level, the technical outlook now is neutral at best, and the recent rise in real interest rates has put a damper on the fundamental outlook.

Copper rose 1.74% last week amidst chatter of mine worker strikes in South America, as well as with the risk-on tone in stocks. The trend in copper has turned higher, and that is an anecdotally encouraging sign for the reflation trade despite the slew of recent disappointing economic data.

In the energy market, oil posted a solid weekly rally with WTI gaining 5.30%. There were some bullish headlines, including the very large draw in the weekly EIA data for both oil and gasoline. But taking a closer look, the numbers weren’t all that bullish. Sentiment is playing a role in the price action right now, and an overcrowded short side of the market has resulted in a steady short covering rally towards the upper $40s. That rally could continue near term, but the long-term outlook remains bearish mainly because of the firm trend of rising US production.

Rounding things out with natural gas, futures rallied last week as industry data showed signs of lower production while government inventory data was slightly bearish. The bulls prevailed, however, as futures gained 4.31% and the market is looking to establish a near-term bottom between $2.85 and $2.90. If that support is violated, futures could quickly move down to $2.60.

Looking at Currencies and Bonds, the multi-week reflation trade in Treasuries partially unwound last week while the Dollar Index dropped to 2017 lows thanks to dovish comments from Fed Chair Yellen, and the soft economic data. The 10-year yield fell 8 basis points to 2.32% while the Dollar Index lost 0.89%.

Yellen and the soft CPI and retail sales were the main reasons for dollar and Treasury yield weakness. First, Yellen’s Humphry-Hawkins testimony was taken as dovish by markets, although we maintain her comments didn’t shift the outlook for the Fed. The slightly soft CPI and outright bad June retail sales reports further weighed on the dollar and bonds.

While the 10-year Treasury yield was decidedly lower last week, it did hold support at 2.28% (the breakout from two weeks ago). There also was some modest resilience in the price action, and rightly so, as last week’s data isn’t likely to result in a change in policy expectations by itself (it’ll take more weak inflation data for “no December hike,” and likely a downturn in growth data for no balance-sheet reduction).

Going forward, the economic data and ECB meeting will be important this week regarding the next direction in yields (remember that German bunds are leading Treasuries, so if Draghi is hawkish that will push yields higher). Bottom line, support at 2.28% now is important in the 10-year yield to confirm the break of the March-June downtrend in yields.

Looking internationally, the euro was up modestly (0.3%); however, it did hit a new-2017 high. The pound closed above 1.30% (up 1%). Yet the big story was the near-2% surge in the loonie, as the Bank of Canada raised rates for the first time since 2010 while also offering positive guidance. Anecdotally, that does show that globally, the world’s central banks are becoming less dovish. Now we need better data to support stocks through this transition, but so far in the US, we haven’t seen it.

Special Reports and Editorial

Momentum Indicator Update

About two months ago, as markets were grinding relentlessly higher despite underwhelming economic fundamentals, I identified four momentum indicators that would tell us when this market was losing momentum and when the chances for a pullback were rising.

Those four indicators were: 1) Consumer sentiment, 2) NYSE Advance/Decline line, 3) Semiconductors (SOXX) and 4) Super-cap internet (FDN).

Over the subsequent eight weeks, three of those four indicators have remained broadly positive. Only semiconductors have lost momentum (SOXX hit multi-month lows in Thursday’s selling). But while the three remaining momentum indicators are still giving positive signals, recently there have been some signs of fatigue.

First, FDN held the June lows, but it’s stuck in a range currently and can’t seem to break to a higher high.

Second, the NYSE Advance/Decline line is sitting on an uptrend in place since late-February 2016, and if we get any sort of a nasty sell-off in the next few days (like we saw last Thursday) that trendline could break.

Finally, looking at consumer sentiment, unending skepticism towards this now eight-year-long rally remains its most consistent fuel; however, that may finally be changing.

Retail investor sentiment indicators remain overly cautious. The American Association of Individual Investors Bulls/Bears Sentiment is cautious, as there is just 29.6% bulls vs. a historical 38.5%. But, in a notable change, the number of bears also is below average (29.9% vs. the average of 30.5%).

The difference is made up in the “Neutral” category, which has surged to 40.6% vs. an average of 30.5%. Now, that’s not overtly bullish, but it anecdotally reflects the idea that you simply “must” be invested as they market grinds higher. And, that idea is in line with a recent similar reading from institutional investors.

Yesterday, I read a survey from Citi that showed institutional investors are holding their lowest levels of cash since before the financial crisis! According to survey respondents, in June the median cash holdings for institutional investors was just 2.5%, down sharply from the 7.5% level at the end of September 2016. That’s the lowest level of cash on hand since before the financial crisis.

Now, one statistic doesn’t mean an impending market pullback, but this survey data does generally correspond to the idea that the TINA trade (There is No Alternative to stocks) has finally, and begrudgingly, pulled the remainder of cash off the sidelines and into the market.

And, as history has taught us, we can all guess what happens next.

Regardless, the major point I’m trying to make here is this: We’re nearing a pretty substantial tipping point in markets, and while both the bulls and bears have points of evidence on their side, the benefit of the doubt remains, for now, with the bulls. Still, we need a continuation of the recent better economic data and better inflation numbers to power this market higher, otherwise the chances of some sort of a pullback will indeed rise.

Political Update

Politics interjected itself into the markets last Tuesday, this time via a release of emails from Donald Trump Jr. regarding his meeting with Russian surrogates. But that wasn’t the only news out of Washington, as Senate Majority Leader McConnell has cut short the August recess to work on healthcare. While those two issues dominate the media, the really important Washington-related events (from a market standpoint) continue to be largely ignored. So, I wanted to take a moment and provide another Political Update.

Issue 1: Russia

Potential Market Impact: Not very big unless something substantial changes.

As has been the case for months, this topic dominated the headlines and drowned out almost everything else in the markets.

But, as has also been the case, from a market standpoint the whole Russia subject remains much more of a media issue than a markets issue. I don’t say that to minimize any opinion you might have on the matter, but the fact is that until there is irrefutable evidence that Trump (or Trump’s team via direction from Trump) acted explicitly to interfere with the election outcome or break some other law, impeachment or removal of Trump remains an extremely remote possibility. Again, that’s because impeachment is a political, not a judicial, process, and it’ll take a lot for Republicans to impeach a sitting Republican President (and the same goes for Democrats).

Going forward, this Russia issue clearly isn’t going away as the Trump Jr. emails, while not directly incriminating, aren’t exactly exonerating, either. For now, any “Russia” dips should be bought.

Issue 2: Healthcare Bill

Potential Market Impact: Positive if the Healthcare Bill Fails

Looking elsewhere in Washington, Senate Majority Leader McConnell cancelled much of the Senate’s summer holiday when he delayed the start of August recess until August 14, giving our good public servants just three weeks off, as opposed to the normal five or six. The ostensible reason for the removal of the recess is to work on the healthcare bill, which at this point appears all but dead.

From a market standpoint, healthcare is only really important due to its effect on tax cuts. In many ways, markets want healthcare to fail, and fail quickly, so that Republicans can focus solely on tax cuts. To boot, if healthcare fails, it’s almost a certainty that Republicans will exit 2017 with almost no legislative accomplishments, so the pressure will be on to cut corporate taxes in 2018… especially given it’s an election year.

The bottom line with healthcare is this: Passage of an Obamacare repeal/replace bill still looks slim, but that’s ok for markets as long as it doesn’t endanger tax cuts in 2018. At this point, the sooner Republicans move on taxes, the better, so don’t be surprised by a relief rally if the healthcare bill officially fails in the Senate.

Issues 3 & 4: Debt Ceiling Extension & Government Shutdown

Potential Market Impact: Very negative.

The media is so myopically focused on Trump and healthcare that it’s largely ignoring the actual important, Washington-related events in 2017, which are the debt ceiling and government shutdown.

The debt ceiling must be extended by early October while the current government spending bill ends on Oct. 1 (if another spending bill isn’t passed, the government shuts down). Now, the probability of either event happening is slim, because Republicans control Congress and the White House, and that would be the quintessential shooting of oneself in the foot. However, that doesn’t mean we won’t walk right up to the line again and give everyone a scare.

Bottom line, Washington remains much more bluster than bite for markets, but we are getting close to events that could actually move markets. Regardless of the headlines and sensationalism, the key is to look past the noise and stay focused on that debt ceiling and government shutdown in late-September/early October. That’s really when Washington might (rightly) begin to weigh on stocks.

Yellen’s Humphrey Hawkins Testimony

Markets interpreted Fed Chair Yellen’s comments last Wednesday as dovish, and stocks rallied. However, I think that interpretation is more based on the markets’ perma-dovish expectation, and not the reality of her actual comments.

Broadly, the market confirmed that opinion, as the dollar was higher following her remarks. And though bond yields and banks did decline, the respective drops weren’t bad, especially considering the recent run up in yields and bank stocks. If Yellen was really dovish I would have expected the 10-year Treasury yield to fall sharply. Instead, it just drifted lower.

As I saw it, Yellen was broadly neutral, and most importantly, didn’t do anything to alter the expectation that the Fed will reduce the balance sheet in September and hike rates in December. To prove that point, I want to review the three lines of text the media focused on to spin Yellen’s testimony as dovish, and note they didn’t really change anything from a policy outlook standpoint.

Line 1: “Roughly equal odds that the U.S. economy’s performance will be somewhat stronger or somewhat less strong than we currently project.” I suppose that is less optimistic than if she said, “I think risks to the economic forecast are skewed higher.” But just because she didn’t say that doesn’t mean it’s a dovish statement.

More to the point, Yellen wouldn’t imply risks are skewed higher because 1) It’s probably not true (data hasn’t been great so far in 2017) and 2) She knows she’d spike yields. Additionally, to focus on that one statement is a bit of cherry picking, as Yellen made multiple positive mentions about the acceleration of economic growth.

Line 2: “Rates won’t have to rise much further to get to neutral.” First, that’s nothing new. We know the Fed’s “neutral” interest rate level is very low (likely below 3%). Second, she continued by saying the “neutral” rate will rise over time as the economy gets better. So, as the neutral rate rises, so too will interest rates. Again, nothing new, and not dovish on its face.

Line 3: “There is—for example, uncertainty about when—and how much—inflation responds to tightening resource utilization.” First, tightening resource utilization is Fed speak for a tight jobs market. So, “responds to tightening resource utilization” is just the idea that rising wages (which are the result of a tightening labor market) causes broad-based inflation. Translation, Yellen said, “I don’t know when low unemployment will cause inflation, or how high inflation will get.”

Importantly, Yellen admitted we didn’t know “when” or “how much” inflation would rise given low unemployment, but she didn’t imply we don’t know “if.” Point being, her comments imply it will happen, it’s just unclear when or how big it will be. Again, nothing new… and not dovish.

Bottom Line

Broadly, investors also focused on Yellen’s repeated mention of low inflation, which makes me think Friday’s CPI report could be soft, but to extrapolate out her comments as a dovish shift is too aggressive at this point.

Remember, broad-based financial conditions are still easier than they were to start the year, so the Fed and other central banks are more dedicated to slowly, but consistently, removing accommodation.

Longer term, like it seems to always happen, the Fed will remove accommodation too slowly and we’ll have to deal with some negative offshoot of all the excess liquidity… but that appears to be a (very big) problem for the future. For now, nothing in Yellen’s comments makes us think the Fed is backtracking on expected policy, and it’s not making us abandon our reflation basket of ETFs.

EIA Analysis and Oil Update

Oil futures got ahead of themselves last week as shorts were squeezed out before of the DOE number, and we saw some of that upside move unwound as the inventory data was digested. Last week’s EIA print was bullish on the headline, but there were a few moving pieces in the details that made the data less bullish than the initial look.

First, commercial crude oil stockpiles fell -7.6M bbls last week, which was much more than analysts’ estimates of -3.4M bbls but less than the API’s -8.1M bbls. So, on balance it was less bullish. Second, while gasoline stockpiles fell -1.6M bbls, almost all that move was in the Gulf Coast and not on the East Coast, which suggests demand is not as strong as you might think given a larger-than-expected gasoline draw.

Third, there was chatter that the US commercial crude stocks might fall below 500M bbls this week, and that such a move would be bullish as 500M bbls is a psychologically important level. But, stockpiles fell below the 500M mark three weeks earlier last year, suggesting the supply-demand dynamic is bearish on a relative, year-over-year basis. Furthermore, there was an “adjustment” made in late August last year in the way certain data is reported, and that caused a roughly -15M barrel correction lower in inventories at the time. Factoring that in, stockpiles are technically still well above where they were for this corresponding week last year, which is obviously bearish from a supply standpoint.

Lastly, inventories leveled out (the summer decline paused) beginning this same week last year, and lasted through Labor Day. So, some models are expecting a similar sideways move into the end of summer, which is neutral-to-bearish for prices. Looking to the output stats, lower 48 production rose +25K b/d, almost perfectly in line with the 2017 average of +25.8K b/d. The increase pushed production in the lower 48 to the highest level since the week ending July 31, 2015. On balance, that trend remains a material headwind for the oil market in the medium term.

Bottom line, crude oil futures are attempting to put in a near-term bottom in the low-to-mid $40s, and given the price action in the calendar spreads (which has been bullish over the last few sessions) we could see some consolidation and potentially even a further relief rally towards $50/barrel. Longer term, the relentless rise in US production remains a significant headwind on the market, and because of that our outlook for oil prices remains bearish over the medium term (into Q4).

Earnings Season Preview

Earnings remain an unsung, but very important tailwind of the markets, in part because both 2017 and 2018 earnings keep getting revised upward. And since stock prices are just a total of future expected earnings, those higher earnings are resulting in higher stock prices.

Given Q2 earnings season begins today, I want to take a moment and cover 1) What’s expected, and 2) How earnings can be both a catalyst for a pullback, or 3) Spark a new rally.

First, to give some perspective, what’s important here is to look at the aggregate S&P 500 calendar-year earnings. Think of it as if you got the full-year earnings estimates for all 500 companies, and then added them up.

For 2017, that number (and this is an average between FactSet and Bloomberg consensus) is $131.00/share. So, on a current-year basis, the S&P 500 is trading at about 18.7X earnings (2450/131.00).

For 2018, the consensus headline earnings (again an average of FactSet and Bloomberg) is $146.46. However, you have to take next year’s earnings with a grain of salt, as they almost always come down throughout the year by around 5%-10%. There are multiple and varied reasons for this, but just trust me that is what happens.

So, if we reduce the $146.46 by 5%, we get $139.13. (I’m reducing it by just 5%, because corporate performance has been strong and the market feels good about corporate America).

At $139.13, the S&P 500 is trading at 17.6X next year’s earnings. Most analysts (including me) consider 18X the “ceiling” for a next year P/E multiple. So, there are several important takeaways from this analysis.

First, in order for this market to move higher, we must not see that $139ish 2018 S&P 500 number go down following this earning’s season. If it does, this market instantly becomes more expensive (for instance, if the expected EPS drops to $135, then the market is trading 18.15X earnings, which in my view would be too expensive).

Second, if that 2018 number moves higher following Q2 earnings season, then stocks can rally further… and we’ve seen that throughout 2017. Expected earnings for 2018 in January were in the mid $130s; however, corporate results have been stronger than expected, so that number has moved steadily higher, and that’s helped underpin the rally in stocks. If Q2 earnings season is strong, this market can rally further and still not break above that 18X valuation ceiling.

Bottom line, for all the focus on politics, the Fed and macro factors, the real push behind the 2017 rally has been earnings growth. In 2017, the S&P 500 is expected to earn $131/share. In 2018, it’s expected to earn $139/share. That’s at least 6% earnings growth with upside risks. So, until something in the macro economy puts that earnings growth at risk (like materially higher yields, geopolitical scare, turn in US & global economic data) the fact remains that while the stock market is historically expensive, it’s not prohibitively so.

Getting this earnings season “right” from a valuation standpoint will be an important signal on whether we need to reduce exposure, or allocate more to equities. We will be watching, and as soon as we get enough data to get some confidence on 2018 earnings, we will let you know.

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