We see very low risk of an imminent U.S. recession. GDP growth has
continued at a good clip in the U.S., and tax reform and deregulation
can provide further catalysts from here. With tighter labor markets
and increased incentives to make capital expenditures, we expect U.S.
businesses to re-invest in their businesses at higher rates than recent
years. While we are monitoring a falling savings rate as a potential
signpost of weakness, the U.S. consumer looks to be in good shape
overall, benefiting from job growth, wage gains and rising housing values.
Corporate fundamentals—including earnings, sales and revenue
growth—are very strong, and equity valuations look more
reasonable due to the tailwinds that tax reform provides corporations.
We expect good company earnings announcements to steady the
U.S. equity market and push it higher. That said, year-over-year
comparisons are likely to become harder as time progresses, given the
healthy growth expected over the nearer term.
There is every reason to expect inflation will continue rebounding as slack
in the U.S. and global economies decreases. At this point, the trend merits
close monitoring, but not consternation. Inflation is coming off historically
low levels and remains contained, with realized inflation readings
significantly trailing expected inflation (Figure 2). As economic growth
continues, the Fed is likely to maintain a gradual course. We anticipate at
least two more short-term interest rate hikes in 2018, with the yield curve
flattening as global bond markets hold U.S. long-term rates in check.
In an environment of continued economic growth and more normal
interest rates, the bond surrogate trade is over. As the search for income
becomes easier, it should be less of a dominant focus in the equity
market, cyclical growth sectors should enjoy greater market recognition,
with utilities and real estate coming under increased pressure. We believe many of the technology growth names that sold off in the wake
of negative headlines will stabilize. Through the remainder of the bull
market, we could well see a narrowing of leadership across all sectors,
which would benefit active managers.