Key Points
  • U.S. stock indexes have rebounded from their correction lows, although remain short of new highs; but risks remain elevated that additional bouts of volatility will likely erupt.

  • First quarter earnings season has exceeded elevated expectations allowing valuations to improve alongside the recent consolidation in prices; but geopolitical concerns persist and uncertainty about the midterm elections could keep investor sentiment from becoming frothy again, and keep the Federal Reserve from tightening policy more swiftly.

  • European and Japanese earnings seasons have resulted in better stock market performance in those regions than in the United States, despite a lower “beat” rate—a further illustration that diversification is essential at this stage in the market cycle.

We’re not in Kansas anymore

Investors may be feeling a bit like Dorothy from the Wizard of Oz who was dropped into a world that was nothing like she had known. In 2017, all news seemed to be good news and stocks moved consistently higher, while volatility stayed remarkably low. Now well into 2018 and it’s a completely different world—most news is seen through more negative lenses, volatility has returned and although stock indexes have rebounded off their lows, they continue to struggle a bit to find direction.