Market Consensus

Market Consensus

Executive Summary

Market consensus describes our view of investor expectations about key economic and market variables that we believe are currently reflected in securities prices. For U.S. and international markets, we present a standard base-case scenario as well as a balanced perspective on potential upside and downside scenarios.

  • All Markets
  • U.S. Market
  • International Market
  • All
  • Consensus
  • Upside
  • Downside

U.S. Market Consensus

Economy (As of January 2019)

Consensus

U.S. economic growth is slowing, and a soft landing is anticipated at a sustainable growth rate of 1.5 to 2% this year. With the aging U.S. economic cycle, there is an increased likelihood of a recession in 2020.

Upside

Various uncertainties—including trade, monetary policy, and political risks—are resolved, leading to a wave of capital spending and a virtuous economic cycle of stronger growth and higher productivity and wages.

Downside

Key risks manifest, and confidence crumbles. Trade war discourages spending, and margins start to roll over. Slower-than-expected growth in China and/or Europe drag down the U.S. into a recession this year.

Interest Rates and Inflation (As of January 2019)

Consensus

The Fed funds rate is maintained at 2.5 to 2.75%, with no hikes in the first half of 2019 and maybe one later in the year. The balance sheet winds down at the same rate, as investors await clarity on Fed policy.

Upside

Stronger economy continues to drive down unemployment and accelerate wage growth. A cautious Fed proceeds at a measured pace. With higher wages, consumer consumption rises modestly, keeping inflation in check.

Downside

Unemployment continues to drop, and wages spike, squeezing margins. The Fed raises interest rates in anticipation of inflation, but this proves to be a policy error as fragile global markets recoil dramatically.

Corporate Earnings (As of January 2019)

Consensus

While headwinds loom, U.S. economic data and corporate earnings remain constructive. Earnings growth is expected to slow to 5 to 6% for 2019, with the possibility of disappointing quarterly periods.

Upside

Trade dispute is resolved. China and emerging markets thrive as global economic activity resynchronizes. U.S. earnings growth is sustained at 9 to 10%, while lower tariffs spur capital spending and manufacturing.

Downside

Full recession in 2019, earnings fall by +20%, and oil prices plunge further. Companies expecting higher consumer spending are caught off guard and struggle as recession crushes fragile confidence and optimism.

Equity Valuations (As of January 2019)

Consensus

After the market upturn in January, valuations are more in line with underlying fundamentals. However, the late stage of the economic cycle, slower earnings growth, and trade tensions are looming concerns.

Upside

Confidence soars as key risks are resolved, resulting in renewed enthusiasm for equities. China's stimulus efforts become evident in data, companies engage in capital spending, and global activity resumes.

Downside

The economic cycle ends abruptly resulting in a recession. Multiples are compressed sharply, and uncertainty and fear cause investors to withdraw and flee.

Investor Sentiment (As of January 2019)

Consensus

In December, fears of an imminent recession, escalating political risk, and weakness in China roiled markets. Sentiment shifted by January as a cautious Fed and optimism about a trade deal boosted confidence.

Upside

U.S. and China resolve the trade dispute, China stimulus starts to come through in the data, and the Fed pauses rate hikes. Despite an aging U.S. economic cycle, investors reembrace risk, and confidence soars.

Downside

Trade negotiations spiral downward with no resolution. Meanwhile, the trade war has a greater-than-expected impact on China. Confidence plummets, resulting in a global recession.

International Market Consensus

Europe (As of January 2019)

Consensus

The long-awaited recovery is unlikely, and the best-case scenario is sustained slow growth and valuations expansion. Uncertainty diminishes, and the European Central Bank's policy remains on hold until 2020.

Upside

The UK's separation from the European Union is delayed, calming political risk. China stimulus manifests, creating external demand, and provides cyclical upside, particularly for European exporters.

Downside

Trade relations with the U.S. worsen, and auto tariffs resume. China weakens, and stimulus is domestically focused, with no benefit to Europe. The already stressed banking system ceases to function effectively.

Japan (As of January 2019)

Consensus

Domestic growth is impaired by demographics and no inflation. Despite favorable domestic policies, Japan's dependence on global trade poses a headwind, and investors are staying clear.

Upside

Trade risk dissipates. Markets are re-energized, and confidence is boosted as investors acknowledge strong earnings, cheap equity valuations, improving corporate governance, and better management.

Downside

Trade war worsens, dampening global demand and causing uncertainty. Companies exporting to China continue to suffer. The yen appreciates due to risk aversion, and earnings are pressured.

China (As of January 2019)

Consensus

Efforts to stabilize the economy have yet to become evident. Concerns linger due to the lack of transparency in economic data, elevated debt levels, and weakening export demand.

Upside

Trade dispute leads to positive reforms, and China adopts fair trade practices, resulting in better global relationships. The government stimulates the economy without creating overcapacity and debt issues.

Downside

Stimulus efforts fail and the economy keeps slowing, pulling down the rest of the world. The U.S. makes aggressive demands, and neither side is willing to budge. China's relationship with the West becomes adversarial.

Emerging Markets (As of January 2019)

Consensus

The fate of emerging markets is tied to China, rates, and the dollar. Uncertainty scared investors off despite compelling opportunities, but recent optimism for risk resolution has led to increased interest.

Upside

Trade war is resolved, China's economy stabilizes, and the U.S. dollar moderates. Investors acknowledge attractive emerging markets fundamentals and cheap equity valuations.

Downside

Trade war continues and China's efforts to stimulate its economy fizzles. A Fed policy error results in higher rates, and investor sentiment plummets causing global markets to go into turmoil.

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