S&P 500; US Indexes Fundamental Weekly Forecast – Falling Treasury Yields Could Be Supportive

U.S. benchmark and blue chip indexes were little changed last week with both settling lower as money flowed into the tech-driven index, which finished higher. The daily market moves continued to be volatile although rangebound. Investors continue to assess the impact of strong first-quarter earnings and improving economic growth with worries about rising interest rates and a potential U.S.-China trade war.

For the week, the benchmark S&P 500 Index settled at 2663.42, down 0.20%. It’s down 0.40% for the year. The blue chip Dow Jones Industrial Average closed at 24262.51, down 0.20%. It’s off 1.80% in 2018. The tech-driven NASDAQ Composite finished at 7204.60, up 1.30%. It is still holding on to a 4.40% gain for the year.

Last week, the Federal Open Market Committee held the funds rate at a target of 1.5 percent to 1.75 percent, as expected. The committee noted that “overall inflation and inflation for items other than food and energy have moved close to 2 percent.” The Fed also noted some improvements in the economy, saying, “business fixed investment continued to grow strongly.”

The committee approved the decision to hold rates steady unanimously, though it has publicly disagreed about how aggressive the path forward should be. Multiple officials are scheduled to speak publicly in the coming days.

The Fed offered no hints as to the pace of future hikes which many investors have placed at two. The next rate hike is widely expected in June. The second could come in either September or December.

Helping to hold the number of rate hikes at two was Friday’s disappointing U.S. Non-Farm Payrolls report. The headline number came in below expectations, the unemployment rate hit an 18-year low, and Average Hourly Earnings offered little evidence that inflation is out of control.

Forecast

Stocks were muted last week by the Fed’s decision and the weak, but consistent jobs data. While the Fed left interest rates unchanged as expected, it also acknowledged the presence of inflation which tends to weigh on stock prices. The jobs data was weaker than expected, but consistent. It was also not as exciting as last year’s robust numbers.

With earnings season winding down, stock market investors will be searching for a new catalyst to drive share prices higher.

According to Edward D. Jones & Co., L.P., “81% of S&P 500 companies have reported first-quarter earnings, with results on pace to be the strongest since the third-quarter of 2010. Particularly encouraging is the 8.5% average revenue growth, the strongest increase in sales since the third-quarter of 2011, reflecting an improving economic backdrop and rising confidence/investment. Looking ahead, expectations are for 19.5% profit growth in 2018, setting a strong foundation for the ongoing bull market.”

“The downside to this strength, however, is the higher bar of expectations, which, as last week demonstrated, is likely to produce periodic disappointments even when the data are positive. While rising earnings won’t prevent short-term pullbacks, investors can find comfort in the broader trend. Since 1980, in years when corporate earnings rose by more than 10%, the average annual return in the stock market was 16%.” That last fact was courtesy of Bloomberg & Morningstar Direct.

Although the research from Edward D. Jones is supportive, I think the pace of Fed interest rate hikes will exert a strong influence on the direction of the stock market. A rapid rise in rates could even have a negative influence on future earnings.

This week’s action could be influenced by the direction of 10-year U.S. Treasury yields. Given last week’s Fed announcement and jobs reports, it looks as if yields may have topped. This could provide some underlying support for stocks.

Gains may be limited, however, by concerns over the U.S. decision on the Iran nuclear deal and renewed tensions over a potential trade war between the U.S. and China after last week’s strategic meetings ended with nothing being resolved.