our European equity strategy team have published a note this morning highlighting that with 70% of market
cap having reported so far, European Q2 EPS growth is at 5% year-on-year, up from 0% in Q1 and only
slightly below the 6% registered earlier in the season. This represents a slight positive surprise
relative to consensus expectations for the companies that have reported, which is a good result, given
that the sharp deterioration in Euro area growth momentum in Q2 pointed to the risk of a downside
surprise. Consensus expects EPS growth to end the earnings season at 2% and then to accelerate to 10% in
Q3. Energy, financials and consumer discretionary continue to provide the largest boosts to index-level
US outlook bends but doesn't break as trade stakes rise
In the wake of the advance Q2 GDP
report, comprehensive benchmark revisions, July employment report, and recent developments on the trade
front, we have made minor changes to our near-term economic outlook. Most importantly, we now assume that
25% tariffs will be implemented on an additional $200bn of imports from China. Our base case is that
these tariffs go into effect in the fall but that tensions are resolved within a few quarters, which
should limit the impact on growth and consumer inflation.
With respect to our 2018 forecast,
the mark-to-market adjustments that we would have made to account for the recent benchmark revision and
employment reports are largely offset by changes that take into account our new base case for trade. Our
2018 real GDP growth (Q4/Q4) forecast remains at 3.0%, reflecting a one-tenth negative impact from trade
disruptions offsetting the upward revisions to the data for the first half. Similarly, our core PCE
inflation projection remains at 2.1%, which includes a one-tenth bump from tariffs offsetting the
downward revision to core PCE in the benchmark revision. Our unemployment rate forecast has been raised a
tenth to 3.6% by year-end, which reflects stronger than expected labor force participation in recent
We have lowered our 2019 growth forecast by a tenth to 2.4%, largely due
to modestly diminished business investment. The unemployment rate should fall to 3.4% for year-end 2019
with core PCE inflation rising to 2.3%. Our 2020 growth forecast is unchanged at 1.3%.
outlook for the Fed remains the same, as well. We continue to expect quarterly rate hikes through the end
of 2019, resulting in the fed funds rate topping out at 3.4% in Q4 of next year.
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