U.S. equities rose for the fifth straight week, shrugging off worries over trade, as the S&P 500 index climbed 0.8 percent. Since the start of the third quarter, the index has gained 4.5 percent, led by healthcare, industrials and financials. That was not the case last week, however. With the exception of healthcare, which posted another strong week, last week’s best gainers were real estate, staples and technology, which stabilized after stumbling the previous week. And so far in the quarter, the debate over whether value or growth stocks are more attractive has been replaced by a market in which both value and growth sectors are participating.

With little evidence that trade tensions between the U.S. and China are likely to recede anytime soon, investors have chosen to focus on the strength of corporate earnings to push stocks higher. According to Factset, second quarter earnings are now on pace to rise 24 percent, as some 80 percent of companies are beating expectations. But for how long investors will continue to overlook trade tensions remains to be seen.

Second quarter results indicate that there has so far been little aggregate impact from trade, but that is small comfort to industries that have been directly affected, such as agriculture. And some companies that have seen their input costs rise as a result of tariffs have indicated their intention to pass along those higher costs by raising prices. But the longer trade tensions persist the more deleterious the impact will be on corporate planning and the greater the disruption to supply chains. So far, earnings expectations for the rest of the year have held up at approximately 20 percent. But Factset also reports that expected results for the third quarter have come down slightly since the quarter began, a reversal from the experience of the first two quarters.

The U.S. Economy Remains Solid while the Eurozone has Moderated

Last week’s economic reports served to reinforce the notion that growth in the U.S. remains generally solid, while elsewhere there is evidence of moderation. The U.S. unemployment rate once again dipped below 4.0 percent in July, as the economy added 157,000 new jobs. That headline total was slightly below expectations, but the prior two-month total was revised higher by 59,000. And there remains little evidence that inflationary pressures are rising in any meaningful way, as average hourly wage growth rose just 2.7 percent, and the year-over-year rise in the core Personal Consumption Expenditure (PCE) deflator edged down to 1.9 percent in June from 2.0 percent in May. And strength in the manufacturing sector remained robust in June, although the pace of activity did slow from the previous month.

In the Eurozone, second quarter economic activity moderated to a pace of 0.3 percent sequential growth after seven straight quarters of 0.4 percent or higher growth. The year-over-year pace of activity moderated to a still quite healthy 2.1 percent, but well down from 2.5 percent at the end of the first quarter, and 2.8 percent at the end of the year. And in China, the composite purchasing managers index edged lower for the second straight month.

Central Bank Policies and Trade Continue to be Top of Mind for Investors

The Federal Reserve kept the overnight rate unchanged last week, as expected, while reiterating its view that the economy remains on solid footing. According to the CME Fedwatch tool, the odds of another rate hike in September rose to 94 percent by week’s end, from 89 percent the week prior, while the odds of a fourth rate hike in December rose to 70 percent from 65 the prior week. The Bank of Japan (BOJ) tweaked its policy of targeting the yield on the ten-year government note, allowing for a wider band around the central target of 0.0 percent. But otherwise, the central bank reiterated its accommodative policy, easing concerns in global bond markets of a more hawkish outcome. For the week, the yield on the U.S. ten-year was unchanged at 2.95 percent, although it did close fractionally above 3.0 percent midweek, before receding following the jobs report on Friday. Bond traders did, however, continue to test the resolve of the BOJ by sustaining the rise in yield to 0.09 percent set the prior week.

The July consumer price index tops the domestic economic calendar this week, and about one-fifth of S&P 500 companies have yet to report. In China, trade and price data for July are scheduled. And of course, trade tensions will not be far from mind.

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