2019 market outlook: Growth remains, but on less stable footing
WEEKLY MARKET COMMENTARY |
The sideways global economic growth trend in place since 2012 is likely to continue, however our expectations are that this occurs on less stable footing. As benefits from U.S. fiscal stimulus (tax reform) wane and global central banks signal less accommodation, equity growth will come to rely more on the earnings of companies than external factors. The global economic growth outlook appears resilient but with three primary headwinds mounting:
- Tighter financial conditions – Rising U.S. short-term interest rates and the shrinking of the Federal Reserve balance sheet will both lead to tighter U.S. monetary and fiscal conditions, which can weigh on global economic growth and create a more challenging backdrop for business activity.
- Trade tensions – While there are always winners and losers in trade negotiations, more tariffs result in lower economic growth and less consumption globally. After 10 months of negotiations, trade tensions between the U.S. and China remain largely unresolved. The duration of these trade disputes signals the distance between two largest nations and will result in greater uncertainty.
- Risk to profit margins – Rising interest rates and wages can slow the pace of profit margin expansion and make it difficult for some businesses to sustain current profit margins. Nevertheless, falling margins do not mean negative growth, but rather a more tepid earnings growth outlook and tighter business conditions.