Last Week:

U.S. equities finished negative for the week: The S&P500 was headed for its worst week since last December before the index turned positive Friday on headlines around the U.S./China trade talks. On the week, equity markets still finished negative, with the Dow Jones Industrial Average (Dow) losing 496 points (down 1.88%) to 25,942. The Standard & Poor’s (S&P500) index decreased 51 points, or fell 1.74% to 2,881. The Nasdaq closed 2.54% lower at 7,917 while the 10-year Treasury ended the week at 2.46%.

Following the President’s announcement at the beginning of the week, the United States raised tariffs on $200 billion of Chinese goods from 10% to 25%, effective Friday, May 1, 2019. In addition, the President is proposing levying an additional 25% on the remaining $300 billion of Chinese imports that remain untaxed. In retaliation, China is raising tariffs on $60 billion of U.S. goods starting on June 1, 2019 and announced it could potentially stop purchasing some U.S. agricultural products, according to China’s Ministry of Finance. As per the White House, the tariffs came after China backed out of significant components of the developing trade agreement. As expected, global equity markets reacted negatively to the news, with stocks down over 2% this morning. According to the White House, there is a “strong possibility” President Trump will meet with President Xi during the upcoming June G-20 summit in Japan. The recent escalation in trade tensions should continue to generate some headlines over the next several weeks, as trade remains an overhang in equity markets.

During the week, we also saw some macro-economic data out. The Bureau of Labor Statistics reported U.S. inflation as measured by the Consumer Price Index (CPI) rose +0.3% in April, with the trailing 12-month rate modestly up to +2.0%—the largest 12-month increase since the period ending November 2018. A sharp pickup in the gasoline index (up 5.7%) was responsible for two-thirds of the CPI increase during the month, while the food index fell in April—its first monthly decline since June 2017. Core CPI (CPI ex-food and energy) increased +0.1% during the month and rose +2.1% over the last 12 months, modestly up from March’s +2.0% reading. Although inflation outside of food rose during the quarter, it appears to be a manageable increase, right within the Fed’s comfort zone (around 2% target), and hence does not signal a need to be aggressive with hikes.

On corporate earnings, first quarter earnings season is beginning to wrap up with 90% of the companies in the S&P 500 index having reported actual results—59% reporting earnings above analyst expectations. The earnings growth rate for companies that have reported so far is -0.5% compared to the first quarter of 2018, while revenue growth for the quarter is +5.3%, a deceleration and the slowest rate since second quarter of 2017. For companies with greater than 50% of sales generated in the United States, revenue grew +7.3%, while more international companies (less than 50% of sales in the United States) grew topline +0.2%. On FactSet consensus estimates, the forward 12-month Price-to-Earnings (P/E) ratio for the S&P is now 16.5x. This P/E ratio is right in line with the 5-year average, but above the 10-year average of 14.7x.

Source: Strategas Research Partners
Source: Strategas Research Partners

Look Ahead:

The corporate calendar will slow down this week as first quarter earnings season winds down. Notable reporters include Cisco, Macy’s NVIDIA, Applied Materials, and Walmart, among others. There will also be a number of broker conferences and investor meetings during the week.

On the economic calendar, we will see NFIB Small Business Optimism, Import and Export Price Indexes, MBA Mortgage Applications, Retail Sales for April, Industrial Production, Manufacturing Production, Housing Starts, Philly Fed Business Index, Leading Economic Indicator, and University of Michigan Consumer Sentiment. The U.S.-China trade negotiations should continue to generate headlines during the week as well.