2019 2nd Quarter Equity Market Update

Outlook:

While the market may stall in the near term as it sorts out some of the current issues, we believe the positives outweigh the negatives for U.S. equities longer term. Despite the yield curve remaining inverted, earnings are expected to re-accelerate and continue to grow nicely looking ahead to 2020. Moreover, the Fed and other central banks around the globe (ECB, BoJ, and RBA (Australia)) have all signaled a willingness to use monetary policy as support if the economic outlook does not improve. U.S. equities continue to remain our favored geography. While upside for the remainder of the year remains limited following the gains of ~17% already, our base case price target of 3124 for 2020 would imply upside.

Given our belief the market is pricing in optimism while uncertainties abound, we believe a consolidation period near term could transpire (stocks likely trade between ~2800-2954 level). We would opportunistically add to favored sectors if a pullback transpires. However, we believe a Fed surprise of a 50 bp rate cut or a comprehensive trade deal would be necessary to break equities out of the near-term consolidation period we are anticipating. The more defensive sectors have led the market higher for much of the recent rebound while the more cyclical sectors have floundered since trade tensions re-accelerated on May 5. We would like to see a relative performance improvement in the cyclical names to get more constructive on sustainable upside in the near term. We still favor U.S. large-cap, growth equities in the near term. However, if the yield curve begins to steepen, thus benefiting Financials, and Energy continues to move higher, Value, which has a large weighting to these sectors, may benefit, but at this time, it is still too early.