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Market Update: 07-23-18

ANOTHER VERY STRONG EARNINGS SEASON EXPECTED

John Lynch Chief Investment Strategist, LPL Financial | Jeffrey Buchbinder, CFA Equity Strategist, LPL Financial

Second quarter earnings season is underway and may be another good one. Consensus estimates are calling for a 21% year-over-year increase in S&P 500 Index earnings for the quarter, setting up a second straight quarter of 20% or higher growth and marking the eighth straight quarterly increase [Figure 1]. Should results come in ahead of expectations as we expect, our data indicate it would mark the 37th consecutive quarter of earnings exceeding expectations. While tariffs have dominated headlines recently, and some companies are being disproportionately affected, we do not expect trade tensions to have much impact on overall results. The season kicks into high gear this week (July 23–27) with 175 S&P 500 companies reporting.

KEY EARNINGS DRIVERS

We expect several factors to drive S&P 500 earnings growth over 20% during the second quarter: - Corporate and individual tax cuts. Corporate tax cuts have lifted S&P 500 Index profits by about 7%. Consumer spending may also be getting a boost from individual tax cuts that began to kick in this spring. - Strong manufacturing activity. The Institute for Supply Management (ISM) Manufacturing Purchasing Managers’ Index (PMI) came in at a very strong 60.2 in June and has averaged over 59 so far in 2018, in line with the best readings over the past 30 years. Manufacturing activity has historically correlated well with earnings. - Higher oil prices. The average price of WTI Crude in the second quarter of...

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