by Connor Darrell CFA, Assistant Vice President – Head of Investments
After a brief bump following the mid-term elections, markets have struggled to maintain their footing over the past couple of weeks. That trend continued last week with the S&P 500 sliding down 1.54%. International developed markets followed suit, although the much-maligned emerging markets equity index managed a positive gain. The bond market benefitted from the volatility in equity markets as well as some dovish comments from Atlanta Fed President Raphael Bostic (a member of the interest rate setting FOMC chaired by Jerome Powell), who stated at a conference in Madrid that he does not think “we are too far from a neutral policy.” The comment suggested that fewer rate hikes may be necessary and was somewhat contradictory to the statement Jerome Powell made back in October that prompted a surge in bond yields. Ultimately, investors should continue to expect that the Federal Reserve will remain “data dependent” and will be very clear in communicating its intentions to markets.

Corporate Earnings Have Been Strong, But May be Poised to Taper Off
On a year-over-year basis, Q3 earnings growth among S&P 500 companies is poised to reach its highest level since 2010. About half of that growth can be credited to tax reform, which decreased the tax burden on corporations and enabled them to report higher profits, but the other major contributing factor has been the strength of the U.S. consumer. However, despite the robust earnings growth that has been reported by U.S. companies, the equity market has failed to push meaningfully higher in 2018. This can be partially explained by the tendency for markets to be more concerned with the future rate of change of earnings, rather than the absolute numbers themselves. As the year-over-year benefits of tax reform disappear in Q1 of next year, consumers will take on the bulk of the burden in carrying earnings growth forward, and the bottom line is that earnings growth is likely to decelerate. The uncertainty surrounding how much earnings may decelerate is likely a contributing factor to some of the volatility we are observing in equity markets. We continue to believe that the economic environment is conducive to further gains, but caution that returns moving forward will be far less exciting than what investors have experienced over the past several years.