Key Points

  • Volatility ticked higher briefly and technology stocks hit a speed bump as investors may be questioning the durability of the U.S. bull market. We believe strong earnings growth and a solid economy will continue to support further gains, but more volatility should be expected.
  • Economic confusion may be contributing to investor skepticism. The labor market continues to tighten and housing is in good shape, but inflation has been in retreat along with commodity prices. Meanwhile, for the first time in a while, the Fed sounded slightly more hawkish at its June meeting.
  • Valuations vary for good reasons among different regions, and investors should be careful when comparing valuation measures between countries.

Shift in Sentiment?

A bit of volatility returned to Wall Street, with indexes pulling back from record highs and the leading sector performer to this point in the year, technology, experiencing a decent-sized pullback. Meanwhile, we've seen a flattening of the yield curve, which suggests the bond and stock markets may be sending conflicting economic signals.

The yield curve has flattened modestly

The yield curve has flattened modestly

Source: FactSet, Tullett Prebon information. As of June 20, 2017.

We believe the pullback in both tech and the overall market was healthy and served to correct some overly optimistic sentiment conditions. But temper your enthusiasm for a sharp rebound like we’ve seen in the past. The new variable in the equation is a Fed that is more hawkish than the market in terms of the expected trajectory of rate hikes. This has raised concerns over a possible monetary mistake, given lower inflation. Additionally, valuations are stretched; albeit on stronger earnings growth expected for this and next year. We continue to believe that strong earnings growth, a solid economy, still-low interest rates, and ample global liquidity support current valuations; but urge investors to remain disciplined around strategic asset allocations.

Confusing Economy

The U.S. economic picture has been mixed. On the plus side, bank loans have started to show signs of ticking higher, which could indicate greater carry through of improved business confidence to action; as supported by the National Federation of Independent Business (NFIB) survey's optimism reading of a strong 104.5. Additionally, a survey conducted by Evercore ISI Research shows that 30% of companies plan to increase capital spending in 2017, up from just 9% in November of last year.