Market Direction and Stock Trends

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Weekly Headings »» U.S. Equities, Fixed Income, Energy
By: Raymond James Financial | May 17, 2019

• At this stage, the most likely scenario is that both the U.S. and China are leaving room for negotiation despite re- escalation (i.e., 25% tariffs go into effect but are reversed within weeks as both sides come to an agreement). Under this scenario, the S&P 500 is likely to find support near the 200 DMA (2776) or 2665 breakout level in downside moves, and eventually stabilize and rally to a new high (on a trade agreement). This would put the S&P 500 P/E in the range of 16.3-17.0x on down moves. Our 12-month 2964 target equates to an upside of ~6.0-10.5% on a price return basis.

• S&P 500 companies with over 50% of their revenues coming from the U.S. grew sales and earnings by an average of 5.6% and 8.6% respectively in Q1 (and had an average price bump of 0.2% following earnings). This compares favorably to S&P 500 companies with less than 50% of revenues coming from the U.S., which showed 2.1% sales growth and 3.6% earnings growth on average (with an average price reaction of -1.3%).

• Focus of the Week: U.S. and China are leaving room for negotiation despite re-escalation, and investor focus is on the late June G-20 meeting in Japan where Presidents Trump and Xi are set to meet. In the end, we believe cooler heads will prevail. Headline and equity market volatility are likely to increase in the coming weeks, and we expect range- bound trading with investors more guarded until the execution of a deal. Therefore, we would exercise patience with new purchases as favored sectors and stocks are likely to provide opportunities to accumulate during weak periods.

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