Mid-year Review: Brexit, US Jobs, US election, S&P 500 Makes Record High

January 18th we wrote:

"The US economy should grow at the middling rate of 2.5% in 2016, with unemployment hovering around 5% as more Americans rejoin the work force, and with inflation in the 0.5-1% range.  In this context, the US Federal Reserve can move slowly to raise rates, or not at all.  Corporate earnings should grow at a modest rate, reversing the negative trend of the last two years caused by declines in the energy sector.  Bottom line, our forecast of gains in US stocks for 2016 remains intact at 5%, 13% higher than Friday's close.  Stocks may sell off a little more in the next few weeks, possible testing the lows of last August, then resume the long term upward trend." 

At the end of last December we wrote:

"The world economy is going through a slow patch right now, depressing revenues and earnings for US companies (60% derived from international operations.)  Economists often refer to the US as the "locomotive of global growth."  With an improving labor market, firming wage growth, low inflation and still-low interest rates, sustained consumer spending will keep the US economy growing at least 2.5%/year, and in so doing bring along the rest of the planet.  US stocks are just 4.25% off the record set in May 2015.  We have no doubt new records will be set this year." 

So far, the major trends remain intact.  Jobs growth in the US was a robust 287K in June, with an unemployment rate of 4.9% and a modest year over year increase of 2.6% in wages.  Annualized, jobs growth so far this year is about a 2 million annual rate, versus 3 million last year.  Inflation in general rose only 1.0% over the last year, held down by a 10% decline in energy costs.  The Fed may raise rates once, twice, or not at all for the rest of the year.  Q2 earnings for the S&P 500 are estimated to decline 5.6%, the 5th straight quarterly, decline, but projected to gain slightly for Q3 and Q4.  With no earnings growth in over a year, it's no surprise that US stocks remain stuck in a trading range.  Yet, despite MUCH bad news this year, US stocks closed today at a record high, eclipsing the previous high set May 21, 2015, up 6.1% YTD through July 9th.  Stocks are slightly overvalued right now, but may move higher in anticipation of a return to earnings growth in 2017.  

We increase our 2016 forecast on the S&P 500 from 5% to 10%.

Read the rest of the commentary here