The S&P 500 closed at another record high on Friday and all eyes are on the Federal Reserve, which is widely expected to cut rates for the first time in more than a decade on Wednesday.

But corporate fundamentals as well as rate cuts will determine equity market price developments for the remainder of the year. The second-quarter earnings season is at the halfway point, with results in from just over 50% of the market cap of the S&P 500:

* Overall S&P 500 earnings growth for the quarter might slightly miss our 1–2% expectations, but this is entirely due to Boeing's roughly USD 5.6bn charge related to the grounding of the 737 MAX. Earnings growth for the median company in the S&P 500 is on pace to be just over 4%. Sixty-nine percent of companies are beating earnings forecasts, and by a wider margin than average.

* US consumer spending grew at a 4.3% real annualized rate in 2Q and is consistent with comments from the banks and results from large consumer companies such as Coca-Cola, Starbucks, and McDonald's. E-commerce, internet advertising, enterprise IT spending, and aerospace also remain solid, and there are indications that global oil and gas spending is picking up.

* There continue to be pockets of weakness in Europe and China. Disappointing automobile sales in both regions are rippling through global manufacturing supply chains. This is having a negative impact on industries as diverse as semiconductors and chemicals. Semiconductors are also contending with a mature global smartphone market and a pause in datacentre spending after a very rapid pace in 2018.

Our assessment remains unchanged. Earnings growth is sluggish right now, but we expect trends to improve based on supportive leading indicators: favorable access to capital, very low new claims for unemployment insurance, and a recent improvement in capital goods orders to a new high. Also, the negative base effect this year from the 2018 fiscal stimulus and the lagged impact of prior Federal Reserve rate hikes, which are likely weighing on results, will begin to dissipate, especially in 2020.

For 2019 and 2020, we continue to expect S&P 500 earnings growth of 1% and 7% respectively. The expected re-acceleration in earnings growth should support further market gains and we are overweight US stocks. But we expect second half returns will be lower than in the first half and in this environment we favor carry trades. To increase our equity exposure further we would want to see signs of renewed monetary policy easing translating into a pick-up in economic and earnings growth expectations.