We expect U.S. equities to outperform bonds this year based on a slowing but still-supportive macroeconomic backdrop and steady corporate fundamentals. Risks tied to geopolitical concerns, trade uncertainties and slowing global growth will continue to make it a bumpy ride.
Sustaining the bull market –Earnings soared in 2018, growing above 20% in the final three quarters of the year, as shown in the chart. Stocks were boosted by the recent tax cuts and strong economic growth. Our outlook is for earnings to head higher but at a slower pace than last year as the effect of tax cuts has faded. The economy is slowing to a pace slightly below 2.3%, the 10-year average for the expansion. We expect earnings to accelerate in coming months from the three-year low of 2.5% in the third quarter to 6% in the fourth quarter, and to climb at an even faster pace in 2020.
An uncertain global macro environment triggers volatility – Tariffs and trade tensions, geopolitical challenges such as Brexit and tepid global growth pose challenges for equity returns. An impeachment inquiry in the U.S. adds to the headline risk that may, at times, unsettle investor sentiment. However, history shows that economic and corporate conditions, not politics, are what matter most for long-term stock performance. Additionally, we think a trade deal between the U.S. and China, even if long in the making, will help extend the economic expansion.
Stocks are not overpriced – As stock prices hovered near record highs this year, measures of equity valuations climbed in 2019, with large-cap equity values settling slightly above their long-term average. We expect equities to outperform bonds, with help from coordinated stimulus from central banks, making equities reasonably priced, in our view.
Cash allows investors to take advantage of dips in the market and buy quality assets at attractive levels. Keeping cash at the ready helps long-term investors further diversify their portfolios, which is even more critical in the late stages of the bull market.
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