Inside Markets — Fundamental Outlook

Our tactically bullish fundamental outlook from mid-May required continued positive earnings growth, U.S. economic resilience, and improving trade rhetoric/lower effective tariff rate. Positive earnings growth was always the easiest hurdle, given low Q2 expectations. And with nearly 75% of the SPX having now reported, the blended EPS growth rate (actual numbers plus consensus on the rest) stands at +10.2% vs +4.9% expected at the end of the quarter. We can check earnings growth off the list for now.

The last two major U.S. economic reports (Friday’s Jobs Report and today’s ISM services report) shake conviction levels, though recent macro data still meets the definition of resilient. As a side note, total U.S. credit card spending data has been a reliable high-frequency update on consumption with July (through 7/25) spending growth increasing to ~4.1% YoY from ~2.2% in June.

Near-term trade rhetoric is unchanged-to-negative in our view, with now effective tariff rates complicating the macro-outlook. In the near-term, we expect inflation data will be a more important catalyst for markets with July CPI on deck next Tuesday (8/12). Tariff related price adjustments shouldn’t be misidentified as inflation, but they will show up in observable inflation data over the course of a few months. The more lasting negative impact of tariffs is through a reduction in real disposable income, which should compel the Fed to ease policy rates.