As we reflect on the past two years since the surprising Trump election, the U.S. economy and corporate earnings have enjoyed a goldilocks environment with strong growth. The S&P 500 has gained 28% since Trump’s election and the Russell 2000 has risen 29.5%. S&P 500 operating EPS has grown 47% and the 10-Year Treasury yield has surged from 1.85% to 3.20%. All of this has occurred during a very benign inflationary environment where unemployment has fallen to near record low levels. The U.S. has surged higher while the rest of the world has remained fairly stagnant. This divergence has been the key theme in 2018, but U.S. economic/EPS growth is expected to slow in 2019 and the divergence gap with the rest of the world should close. Things may slow, but that is still very different than a decline.
The ISM Manufacturing Index fell slightly in October to 57.7 from 59.8 in September. The prices component strengthened last month, but new orders, production and employment all weakened. By all accounts, manufacturing looks very healthy and this has created some stress on inventories and supply chains. Corporations also remain concerned about the impact of tariffs on already rising input costs.
The U.S. services sector posted strong growth in October based on the ISM Non-Manufacturing Index reading of 60.3. While this was down from September’s 61.6 reading, it was still ahead of expectations. Business activity/production, new orders and employment all softened in October, and corporations continued to sight uncertainty over tariffs and trade disputes. The very healthy manufacturing and services sectors continue to support the strong U.S. economy.
