The US stock market has come roaring back this summer, approaching the record high hit in January.  As we had anticipated in our Q1 2018 Economic Outlook, most of the momentum is coming from big increases in corporate earnings per share — as shown in the chart above. For 2nd quarter 2018, ended in June, S&P 500 companies are expected to post a 20.7% increase in earnings per share vs. the same period last year. This is after a very strong showing in the 1st quarter of 2018 — 26.6% earnings growth vs. Q1 2017. Last time earnings growth approached 20% was in Q1 2011. What’s behind this latest earnings surge, and how long will it last?

As of January 2018, companies on the S&P 500 got a big earnings boost from tax cuts, plus using some of those tax savings to buy back their shares, which reduces the number of shares outstanding and thus increases earnings per share. This momentum is likely to last through this year. But starting in 2019, earnings comparisons will be more difficult, as the chart shows. At the same time, interest rates are likely to have inched higher and economic growth could slow down a bit due to this and a variety of other factors, including the impact of trade disputes and geopolitical tensions.

As shown in the chart, earnings are expected to be strong through the end of 2018 (Q4 2018) and then taper off substantially as the benefit of tax cuts becomes fully incorporated into comparisons. Much higher uncertainty about what will happen in 2019 is a key reason we are maintaining globally diversified asset allocations, and recently added positions that are likely to benefit from higher inflation.