Trade tensions, earnings, and economic data (or lack thereof) are on investors minds this week.
The US-China trade spat broke out again on Friday with Chinese officials declaring a dramatic increase in controls around rare-earth mineral exports. The Trump administration threatened a 100% tariff on Chinese imports unless that was walked back. All eyes are on a potential Trump-Xi meeting in Korea later this month.
Earnings season begins this week with major banks reporting such as JPMorgan and Bank of America. Cash set aside to offset bad loans will be an important figure to watch, as that tends to be a bellwether for the economy. Overall, however, investors expect a good earnings season with earnings coming in about 13% higher than this time last year.
Finally, investors are waiting on important data, such as the unemployment rate, retail sales, and inflation — all of which have been delayed due to the government shutdown. Investors tend to get jittery when flying in the dark, so the longer important data is delayed, the more risk that tends to build up in markets.
Overall, I still see ample weakness in the underlying economic data: all of the classic recession signals are flashing red. However, earnings continue to be strong and, despite high valuations in US stocks, I expect a good earnings season could create a tailwind through the end of the year. There are lots of risks to that view, of course, including the sudden failure of some large companies in recent months, trade tensions, and a drawn-out US government shutdown. In the end, the risks you take in your portfolio are entirely dependent on your goals. If you are unsure what that should look like, let’s talk about it.
Chart of the Week
This week’s chart is courtesy of LSEG and Reuters, showing expected earnings growth by sector. Technology is yet again expected to outperform (largely driven by darlings like Nvidia, Oracle, and other AI names), with the market expecting to average about 8.8% higher earnings than this time last year. Factset suggests that this figure could be closer to 13%. In any case, earnings have been the one bright spot. As investors listen to earnings calls, they will be listening carefully for any sign of future weakness. Valuations are very high, and that can create quite a bit of fragility.
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