by Connor Darrell, Head of Investments
Despite a busy week in Washington headlined by Speaker of the House Paul Ryan stepping down from his post, stocks managed to climb 2% higher last week. The market’s gains were bolstered by a rebound in technology and energy stocks.  Facebook CEO Mark Zuckerberg endured two difficult days of Congressional testimony surrounding data security and privacy on the web. The testimony was well-received by the markets. Bonds were down slightly after the minutes from the most recent Federal Reserve meeting were released and suggested further rate hikes remain likely.

Now that the first quarter of 2018 is in the books, investors can shift their attention to the first earnings season under the new tax laws. Throughout Q1, the stock market was hampered by shifting inflation expectations, a selloff in technology stocks, and fears of an all-out trade war, but the steady flow of new corporate earnings data that is set to commence this week should provide investors with a (much needed) new area of focus. According to Factset, the market is expecting 17.1% growth in corporate earnings, which would be the highest growth rate since 2011. The strong estimates are a product of the reduced corporate tax rates under the new law, as well as increasing consumer confidence and economic growth.

Time to Follow Through

The optimism for earnings growth is in stark contrast to some of the nervousness that markets have exhibited over the past few months, where intra-day selloffs of more than 1% have been commonplace.  That divergence is in many ways a microcosm of the increasingly conflicting signals that investors must grapple with moving forward. Shifting economic policies in the US and the potential for rising inflation and interest rates are offset by improving economic growth and consumer confidence around the world.  But if Q1 taught us anything, it’s that expectations can only get us so far. At some point we need to see real tangible progress, and Q1 earnings season is the market’s first opportunity to prove to us that all the optimism surrounding tax reform’s impact on corporate profits was justified. If earnings live up to all the hype, stocks could find more stable footing and finally put some of these trade fears in the rear view mirror. If it doesn’t, we could all be left a little disappointed.