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4 Economic Trends That Will Matter In The Second Half Of 2016

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4 Economic Trends That Will Matter In The Second Half Of 2016

How much upside is left in 2016? While recession fears are fading and markets have gained almost 20% off the recent lows, we are not likely to see much more unless earnings grow faster than expected.

(As seen on Forbes.com - July 2016)

Valuations are not outrageously expensive, but they are high relative to estimates. Here are four trends that will help determine how equities fare through the end of the year.

1. Actual earnings growth needs to beat the estimates.
Earnings reports this quarter and next will be key determinants of equity prices in the second half of the year. At current levels, estimated earnings justify current equity prices but not much more. Actual earnings often fall short of analyst estimates, so strong gains are unlikely when equities look fully priced based on estimated earnings.

Analysts may have become unduly conservative in recent months, improving the odds that reported earnings will exceed estimates and allow future estimates to rise. Earnings for the second quarter probably have the greatest potential to beat estimates, although third-quarter predictions are also modest. It is possible for equity prices to rise without stronger earnings growth, but that would put even more pressure on valuations.

2. Rising personal income needs to generate strong consumer spending.
Consumer spending is one area that has potential to drive additional economic growth, and that could lead to faster earnings growth. The tightening we have seen in labor markets means that people should find jobs more easily and employers will need to raise wages to attract or retain employees. With the trend toward establishing a $15 minimum wage in many areas, households should see somewhat faster income gains.

Still, households have spent more cautiously this cycle than they have in the past. Rising costs of healthcare, college tuition, and other major expenditures have put household budgets under intense financial pressure. At minimum, spending at least needs to rise in line with income, and hopefully increased confidence will add even more spending growth.

3. European uncertainty’s impact on currencies and exports.
In grabbing international attention, the Brexit vote in the United Kingdom has masked deeper problems in the European Union (E.U.) and Eurozone. As important as Brexit will be over the next two years, Europe’s weakened banking system and high levels of unemployment are much more threatening to the E.U. and the global economy.

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PresidentandCEOMagazine.com founder and CEO, Paul Stukel - discusses middle market issues with business leaders from across the nation.