What lies ahead for the US economy and markets?

Friday 09 November 2018


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The robust performance of the US economy in 2018 has led to the supremacy of US risk assets compared to the rest of the world. Moving towards the end of the year and into 2019, global investors have started to raise questions about whether the US economy and business sector will continue to shine, how inflation will evolve, and which direction the Federal Reserve will take going forward.

On the macroeocomic front, we think that US growth will continue, with some modest deceleration in 2019 that should prevent a more dangerous overheating of the economy. Personal consumption growth and high business confidence continue to be the major drivers of this sound economic phase. So far, tariffs appear to be having minimal effects on the overall economy, with possibly more pronounced effects on corporate margins. Any meaningful impact may not be felt until later in 2019. After the US midterm elections, two possible paths could emerge. The first path is the emergence of divided government, leading to very little meaningful legislation enacted. The second path is a constructive one where there are areas of commonality between Trump and the Democratic leadership in the House (infrastructure spending). We believe, however, that the overall economic picture will remain broadly unchanged. All eyes will, instead, be on the Federal Reserve, as the major assumption of the outlook is for a gradual tightening in monetary policy conditions with no abrupt increase in rates amid only modest upside pressures in wages and prices. No major imbalances are on the radar at the moment. Hence, an economic recession does not appear to be in the cards next year, but markets are likely to become more circumspect with regard to 2020 growth expectations as the deceleration could become more pronounced.

Based on this backdrop, we believe US asset classes will continue to offer opportunities for global investors, but investors will need to embrace a more selective approach.

Our key views on US markets are as follows:

  • US Fixed Income: Close to neutral on duration, with a focus on quality and liquidity in credit. The Fed hiking cycle will be watched closely. We expect the pace of the Fed’s tightening cycle to possibly slow in 2H19 with the scrutiny on economic data increasing. As rates have risen, short- and intermediate-term Treasuries have become more attractive; in addition, agency MBS and high-quality non-agency MBS now also offer lower downside risk. In general, structured sectors appear to be more attractive than corporate sectors, and from a US dollar investor perspective, in this phase, US assets look less risky than other developed or emerging market assets. In particular, extended credit valuations and a rise in risk call for a greater focus on investments in defensive sectors with less downside risk.
  • US Equity: Expect higher volatility, but no change in the trend. Q3 earnings season is confirming strong results. With more than 80% of the companies reporting, surprises are positive (about 6% on average) and the YoY growth on Q3 2017 is almost 30%. US earnings have grown by more than 20% for the 3rd consecutive quarter (+24% on Q1, +25% on Q2 and +26% on Q3). This has been achieved thanks to a strong economy, but also to the tax cuts contribution. Note also that companies’ margins are probably nearing a cyclical peak, given the progressive rise of input costs, including wages. This is usually a sign of maturity, even if it does not imply that earnings growth can’t rise further. The biggest headwinds to US earnings going into 2019 are more international in nature (European instability - China debt) and the strong dollar. As a result, the market is becoming more tilted towards punishing companies that miss market expectations vs rewarding companies that beat estimates, leading to higher dispersion and volatility in the market. On a medium-term view, the fundamental case for US equity remains in place, supported by the positive economic backdrop, with an additional lift potentially coming from the investment side, with US business planning to increase capital expenditure. However, selection of themes, sectors and single names will be increasingly relevant, as the maturity of the cycle could eventually become a headwind. A focus on quality at reasonable prices is key to navigating this market phase, and given the extreme outperformance of growth stocks, we think value themes will become increasingly appealing.

Contributing Authors

Ken Taubes 
Chief Investment Officer, US, 
Amundi Pioneer

Important Information

Unless otherwise stated, all information contained in this document is from Amundi Pioneer Asset Management (“Amundi Pioneer”) and is as of November 9, 2018.

The views expressed regarding market and economic trends are those of the authors and not necessarily Amundi Pioneer, and are subject to change at any time. These views should not be relied upon as investment advice, as securities recommendations, or as an indication of trading on behalf of any Amundi Pioneer product. There is no guarantee that market forecasts discussed will be realized or that these trends will continue. These views are subject to change at any time based on market and other conditions and there can be no assurances that countries, markets or sectors will perform as expected. Investments involve certain risks, including political and currency risks. Investment return and principal value may go down as well as up and could result in the loss of all capital invested.
This material does not constitute an offer to buy or a solicitation to sell any units of any investment fund or any service.

Date of First Use: November 9, 2018.

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