Stock Fundamentals Still Supportive


  • We believe the economic and earnings environment will support the potential for additional gains for stocks over the second half of 2019.
  • Better than expected earnings may be a positive stock market catalyst while historical patterns forecast the possibility of more strength through year end.
  • We encourage investors to look beyond short-term market stresses and consider the real, fundamental drivers of investment returns.

We expect stocks to move higher over the second half of the year. Stocks already have had quite a run in 2019, buoyed by a return to fundamentals, with the S&P 500 Index up 17.4% year to date through June 28 for an 18.5% total return. The decision by the Federal Reserve (Fed) to pause rate hikes was the catalyst for the reversal, as market participants no longer feared that the Fed might unnecessarily restrict growth. U.S. economic data also have generally supported a continued economic expansion, while businesses continue to find ways to effectively navigate the environment. Generally upbeat first-quarter corporate earnings results gave investors another fundamental reason to bid stocks higher


The earnings picture changed in May, however, after US.-China trade talks derailed. Due to the increased risk of a prolonged trade war, on June 10 we slightly reduced our S&P 500 earnings per share (EPS) forecast for 2019 from $172.50 to $170, which would represent 5–6% EPS growth if realized. The forecast is still above Wall Street’s consensus of $168, which we suspect is too low considering the mostly positive fundamental environment. Better than expected earnings may be a positive stock market catalyst.

Valuations remain favorable for U.S. stocks. The S&P 500’s forward 12-month price-to-earnings (P/E) ratio is within historical norms, and P/E ratios relative to interest rates and inflation are both well below long-term averages. Given low rates and inflation, we think a trailing 12-month P/E ratio of 17.5 is appropriate. Combining this with our EPS forecast, we believe at year end the S&P 500 would be fairly valued in the range of 3,000, which is about 2% away from the June 28 close.