Intraday over seven sessions, SPY rallied 5.4 percent.  If not an outright reversal, at least a breather is the path of least resistance near term, creating an opportunity to earn a premium in options.

The 1Q18 earnings season is nearly over.  As of last Thursday, 91 percent of S&P 500 companies reported results.  They are nothing short of astounding.  Blended operating earnings are up 26.4 percent year-over-year, and sales are up 9.5 percent!

At $174, estimates for next year are at a new high, while 2018 was at a new high a week ago, with the latest week down $0.65 week-over-week to $157.

While all this looks and sounds good, this is also a time to be at least thinking about the possibility of peak growth.

As things stand, 2Q18 y/y growth is slated to decelerate to 25.9 percent, with 3Q18 at 28.4 percent, then followed by steady deceleration.

Here is the thing.

First, with the quarter just about done, 1Q18 estimates dropped nearly a dollar in the past couple of weeks – $37.36 on April 26 versus $36.42 last Thursday.  Second, after a sharp jump post-tax cuts of last December, 2Q18 has been flattish for nearly three months now, with the latest estimate of $38.40 versus $38.56 on February 16 (Chart 1).  If this flattish-to-down tendency sustains, 1Q18 could very well mark a peak.  Time will tell.

Stocks struggle when earnings are decelerating, much the same as when the economy is decelerating, which is the case currently.

Chart 2 pits y/y percent change in the S&P 500 large cap index with the ISM manufacturing index.  The latter fell two points month-over-month in April to 57.3, and has softened since reaching a cycle high 60.8 in February, which was the highest since 61.4 in May 2004.  Manufacturing activity rose after dipping below 50 to 49.9 in August 2016.  Sustained readings above 60 are rare.

In the right circumstances, the green line in the chart has room to go lower.  If past is prologue, the red bars will follow.