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Even so, such robust earnings growth has begun to foster concern that we have reached a peak in EPS growth. While we do expect the pace of growth to slow next year, a local peak in earnings growth has not signified an imminent peak in the S&P 500 historically. In fact, about 3/4ths of market peaks occurred more than two years after the peak in the growth rate of earnings. Moreover, stock market returns have remained healthy during this period, with high odds of a positive outcome over the subsequent 6-24 months (see Exhibit 1). In short, the market ultimately follows the path of earnings and while their growth rate may be slowing, their absolute level is still rising. 1. Average / Median S&P 500 Returns Following Peaks in Earnings Growth mw Average Total Return = Median Total Return 4 % of Positive Returns 30% 5 258% * 91% 25% + 20% - 15% + Total Return (%) 10% + 5% | 0% ~ Next 6 Months Next Year Next Two Years Source: Investment Strategy Group, Bloomberg. Inflation and Interest Rates Inflation data has remained at relatively low levels for all of 2018, as shown in Exhibits 2 and 3. In fact, some of the most recent data released in October have ticked slightly lower. Average hourly earnings dropped to 2.8% from the prior month’s level of 2.9%. Headline CPI dropped to 2.3% from 2./% and Core CPI ex-food and energy remain at a low 2.2%, unchanged from the prior month. The Federal Reserve’s preferred inflation indicator, Core PCE, also remains low at 2.0% which is in line with the Federal Reserve's target, and unchanged from the prior month. While 10-year Treasury yields have risen by 0.76% (or 76 basis points) over the course of 2018, we do not think the resulting 3.2% yield is enough to derail US economic growth. Keep in mind that most of the recent increase since late August was due to stronger real growth rather than runaway inflation expectations. We expect interest rates to range between 3.0% and 3.5% in 2019 with a midpoint of 3.25%, barring any major geopolitical conflicts such as one between US and China and or escalating conflicts in the Middle East. HOUSE_OVERSIGHT_02691 1