Window for Stocks to Rally?

Stocks should have a window to rally over the next few weeks.  Headline risk will probably fade into the background, corporate earnings should be strong, and inflation fears may recede.

Headlines will probably become less market negative.  On the tariff front, an auto deal between the US and Europe is likely to be viewed as having a better than 50-50 chance of succeeding.  The US/China dispute will probably devolve into a war of words for awhile.  On North Korea, neither side is likely to jettison the "understanding" from the Trump/Kim summit after just one meeting -- whether or not it was successful.  Away from these issues, Trump will likely be focusing on his Supreme Court nominee and upcoming summit with Putin. 

Corporate earnings for Q218 will be coming out in earnest.   Consensus looks for a strong 20.7% (y/y), and  the macro evidence does not argue otherwise (see my June 17 blog).  Thompson Reuters says, "Of the 20 companies in the S&P 500 that have reported earnings to date for Q2 2018, 90.0% have reported earnings above analyst expectations. This is above the long-term average of 64% and above the average over the past four quarters of 75%."

US inflation data will take center stage this week.  Consensus looks for a 0.2% m/m increase in June Core CPI (due Thursday), a reasonable expectation and equal to the average pace seen so far this year.  While pass-through of tariffs or higher oil prices is a risk, there are potential offsets.   The stronger dollar means prices of imports not subject to a tariff could fall.  Also, news stories indicate a slowdown in housing rents.  The latter comes into the CPI gradually, however.   Consensus looks for the y/y to edge up to 2.3% from 2.2%.  If the Core CPI rounds up to 0.2% m/m from 0.18% or lower, the y/y could stay at 2.2%, however.