S&P 500; US Indexes Fundamental Weekly Forecast – Earnings Season Winding Down, Focus Shifts to Tax Reform

Earnings continued to drive U.S. equity markets higher during a week that also featured the latest U.S. Federal Reserve monetary policy statement, the nomination of a new U.S. Federal Reserve chair, the release of the U.S. House of Representatives’ tax plan.

Investors also had the opportunity to react to the October U.S. Non-Farm Payrolls report and data on consumer confidence and reports on manufacturing and services PMI.

In the cash market, the benchmark S&P 500 Index settled at 2588.00, up 0.3%. For the year it’s up 15.6%. The blue chip Dow Jones Industrial Average closed at 23539.00, up 0.4%. It’s up 19.1% in 2018. The tech-based NASDAQ Composite ended the week at 6764.00, up 0.9%. It has gained 25.7% this year.

As widely expected, the U.S. Federal Reserve kept the target range for its benchmark rate at 1.00% to 1.25%. The Fed also upgraded its assessment of the economy, stating that “economic activity has been rising at a solid rate despite hurricane-related disruptions.” The Fed also noted that core inflation has remained soft. Lastly, the central bank said that its balance-sheet normalization program was initiated last month and that it’s moving along as expected.

President Trump nominated Fed Governor Jerome Powell to serve as the next chair of the Federal Reserve last Thursday afternoon. He is going to replace current chart Janet Yellen, whose four-year term ends in February 2018.

The U.S. House of Representatives’ tax plan includes lowering the corporate tax rate to 20% and a spattering of tax breaks for individuals.

The Non-Farm Payrolls report showed the economy added 261,000 jobs in October, lower than the expected 313,000 forecast. The unemployment rate fell to 4.1%, its lowest level since 2001. Although the report was under the estimate, the net revision to the previous two months showed an increase of 90,000. Traders also noted that September’s hurricane-influenced report was upwardly revised to an 18,000 gain from a 33,000 decline, a net positive of 51,000. Additionally, average hourly earnings grew 2.4% over the past year, notably lower than the 2.8% gain reported last month.

Finally, blowout earnings from Apple carried the major indexes to new all-time highs last week.

 

Forecast

There are no major economic reports this week, but Fed Chair Yellen is scheduled to speak on Tuesday. Earnings season is winding down so there will be fewer catalysts to drive the markets higher.

Investors may continue to digest the jobs data early in the week. However, there doesn’t appear to be anything in the report that could derail the Fed’s plan to raise rates in December. There may be a few lingering concerns over the weak average hourly earnings.

The appointment of Fed Governor Powell as the new Chair shouldn’t cause any issues since he is expected to follow the same path as retiring Fed Chair Yellen.

Changes to the tax code could introduce additional uncertainty into the indexes going forward. There are some concerns as to whether the Republicans will be able to get the bill passed before the end of the year.