At the midpoint of the year, there continue to be both headwinds and tailwinds for the economy and the market, according to Charles Schwab’s Liz Ann Sonders.
Sonders, who is senior vice president and chief investment strategist at Schwab, recently published a midyear outlook commentary for U.S. equities.
“We are entering the second half of the year in the middle of the S&P 500’s trading range, which has been in place since the correction that began in late January,” she writes. “Until the index takes out its January high, it’s considered to still be in correction mode.”
According to Sonders, if this was a typical correction, it would have been at or near new highs by now. She says that the longer that takes, the higher the likelihood that this correction gets “worse before it gets better.”
While trade uncertainty clearly falls into the headwind category, Sonders addresses three other possible headwinds that the markets may face the rest of the year.
1. Peak Earnings Growth
While Sonders calls earnings the “mother’s milk for stock prices,” she also says to be wary of a very high expectations bar heading into 2019.
“[W]hat is lesser known is that at high earnings growth rates, stocks often have middling returns as they tend to anticipate the inevitable inflection point (when earnings stop getting better, and start getting worse),” she writes.
For an example of this, Sonders breaks historical earnings expectations into three primary zones — more than 14.2% growth, between 3.4% and 14.2% growth and less than 3.4% growth — and looks at the market returns.
Since 1984, during the highest zone for earnings growth, the S&P 500 was actually down a median 2.9%, according to Sonders. Meanwhile, during the middle zone, the S&P was up a median 10.2%; and during the worst zone for earnings, the S&P was actually up nearly 14%.
2. Flattening Yield Curve