Last week's Jackson Hole meeting reinforced the consensus view within the Federal Reserve (Fed) that the U.S. economy is continuing to improve and that the Fed expects to achieve its dual mandate of full employment and stable inflation in the coming quarters. As a result, more policy normalization is warranted, and I do expect the Fed will increase rates 0.25% at the September meeting, so long as there are no surprises in the August employment report to be released this Friday. I would define a surprise as an uptick in unemployment above 5.0% or monthly job gains of less than 125,000.
Over the past few months, I have expected stocks to grind higher. I am changing my outlook for the remainder of the year and anticipate stock prices will come under pressure due to valuations. The S&P 500 Index currently trades at 25 times current earnings and 18 times forward expected earnings. I don't expect earnings to meet the improvement expected, and as a result this will lead to pressure on equity prices. I don't foresee a significant selloff, but I would not be surprised to see the S&P 500 Index give back its gains for the year and test 2000-2050 range.
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