LPL Research Midyear Outlook 2019. At the halfway point of 2019, the U.S. economy has held steady, supported by the fiscal stimulus we have highlighted for two years, and corporate profits continue to grow. At the same time, trade tensions are increasingly weighing on the economic outlook, while slowing global growth and ongoing political uncertainty have forced global central bankers to extend extraordinary levels of support.
We encourage investors to look beyond short-term market stresses and consider the real drivers of investment returns, as we believe that mindset may be a key to achieving long-term financial goals. Our Midyear Outlook 2019 provides our updated views of current fundamentals and the things that should persist as shorter-term concerns fade, and emphasizes our four primary pillars for fundamental investing-policy, the economy, fixed income, and equities.
Policy: We believe fiscal stimulus from the Tax Cuts and Jobs Act of 2017, along with decreased regulation and increased government spending, will continue to support the U.S. economy in 2019, and that the potential impact is both larger and more durable than consensus expectations. At the same time, uncertainty around global trade continues to dampen the benefits of fiscal support and may be discouraging productivity-enhancing capital investment. We believe self-interest is likely to bring the United States and China back to the negotiating table, but until we see progress, trade tensions remain the primary risk to our forecasts.
Economy: We still believe fundamentals are supportive of moderate gross domestic product (GDP) growth this year. Again, progress on trade is central to our growth projections, so we’ve slightly reduced our GDP forecast for the United States to 2.25-2.5%.
Global: We still expect emerging markets (EM) to lead developed markets and economic growth, given the challenges in developed markets. Europe faces Brexit challenges, France is contending with “yellow vest” protests, Germany is battling weaker manufacturing, and Italy is struggling with difficult budget negotiations. In Japan, true structural reforms remain elusive and the value added tax (VAT) is scheduled for the fourth quarter.
Fixed income: Fixed income investors have benefited from falling rates due to subdued consumer inflation, a pause in rate hikes, and demand for U.S. Treasuries. Although a flattening yield curve has been troubling for some investors, we believe the flattening is due more to global investors searching for better yields than it is an indicator of looming recession. Considering the Fed, inflation, and our expectation for progress on trade, we now look for the 10-year Treasury yield to reach the 2.5-2.75% range in the next 6 to 12 months.
Equities: The overall U.S. economic environment has supported continued expansion. The Fed’s decision to pause rate hikes boosted sentiment and increased demand for equities. Market valuations remain favorable, with the S&P 500 Index’s forward 12-month price-to-earnings (P/E) ratio within historical norms. We recently reduced our S&P 500 earnings per share forecast to $170 for year-end 2019, mainly because of trade uncertainty, and our year-end S&P 500 fair value estimate remains at 3,000.
- S&P CoreLogic Case-Shiller Home Price Index (Apr)
- New Home Sales (May)
- Conference Board Consumer Confidence Index (June)
- Japan Trade Balance (May)
- Durable Goods Orders (Preliminary, May)
- China Industrial Profits (May)
- GDP Report (Third Revision, Q1)
- Initial Jobless Claims (June 22)
- Pending Home Sales (May)
- Eurozone Economic Confidence Index (June)
- Japan Jobless Rate (May)
- Japan Industrial Production (Preliminary, May)
- Personal Income (May)
- Core PCE (May)
- University of Michigan Sentiment Index (June)
- UK GDP Report (Q1)
- Eurozone CPI Report (Preliminary, June)
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. The economic forecasts set forth in this material may not develop as predicted.
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