Key Points

  • U.S. stock indexes reached new highs but we are concerned that the potential good news is already mostly reflected, while the potential bad news is being largely ignored.

  • Earnings season started with reduced expectations, leading to the possibility of upside surprises. Meanwhile, the Fed seems likely to cut rates, but the impact may be diminished, while recent economic data shows reason for concern.

  • Earnings, especially for financial companies, could differ between the United States and international regions due to diverging global central bank actions.

“Remember that not getting what you want is sometimes a wonderful stroke of luck.”
― Dalai Lama

New records

U.S. stock indexes recently moved to new record highs; however, they are only slightly above January 2018 levels. Investors have been buoyed by the belief that the Federal Reserve will start cutting rates later this month, while also receiving a tailwind from the perceived ratcheting down of trade tensions with China. Rather than climbing the proverbial “wall of worry” the recent move seems to be more of the riding the escalator of optimism. Investor sentiment has reached the extreme optimism zone—a contrarian indicator—according to the Ned Davis Research Crowd Sentiment Poll, suggesting some caution is warranted in the near term. We are also concerned that investors seem to be ignoring some budding risks. There is the potential that the Fed doesn’t deliver the number of cuts the market is currently expecting over the remainder of the year, with fed funds futures currently pricing in a greater than 50% chance of three cuts by the end of the year. We are also skeptical about the actual impact a rate cut may have. As Chairman Powell noted many times in his testimony before Congress, today’s economic “uncertainty” is due largely to trade; it is not a function of rates being too high. As such, we’re skeptical that lower rates are the elixir to what ails the economy—at least not enough to offset the trade-related uncertainty.

Are lower rates really going to help?

While the meeting between China and the United States at the recent G20 summit resulted in a temporary cooling of tensions, the meeting did nothing to reduce the currently imposed tariffs. Both sides have indicated there is still much hard work remaining to complete for a deal; while there was no deadline announced. It’s difficult to envision a reigniting of corporate animal spirits absent a trade deal, which suggests recent weakness in business capital spending is likely to persist. Adding to the trade-related uncertainty, the United States is also at loggerheads with the Eurozone and India; while passage of the USMCA remains bogged down.