(13 JULY 2019)DAILY MARKET BRIEF 1:Earnings lull may temper rate-driven enthusiasm

Driven by expectations for rate cuts following dovish testimony to Congress from Federal Reserve Chair Jay Powell, the S&P 500 is at a record high. The Fed appears willing to cut rates preemptively, even though the economy is growing close to trend and looks to be at full employment – a potentially favorable combination for stocks.

But while we expect modest upside for equities in our base case, stronger equity market gains may not materialize until earnings growth picks up.

Aggregate 2Q S&P 500 EPS growth should be similar to 1Q, with earnings up 1–2% versus a year ago. This period of stagnant—but not shrinking—profit growth will likely persist into 3Q, before growth begins to pick up. More encouragingly, 2Q growth for the average company should be stronger, around 5%.