Meanwhile, Ed Cowart, manager of the Nordea 1 – North American All Cap Fund, expects corporate earnings to improve in 2018 and anticipates consumer spending to remain healthy owing to continued job growth, relatively low oil prices and a pick-up in manufacturing activity.
“Today’s valuations may be slightly above the long-term historical average, but they are well within normal range considering the low level of interest rates,” he says. “We also believe it is important to consider where we are in the business cycle, as equity valuations tend to follow the path of leading economic indicators, which are still improving.
“The positives in the market and economy are encouraging, but we are mindful of a number of risk factors that could hurt investor sentiment. They include geopolitical uncertainty, unwinding of quantitative-easing programmes by global central banks and political gridlock in Washington. Weighing the data, we believe the most probable scenario is for the US economy to maintain its slow, but sustainable, growth.”
John Greenwood, chief economist at Invesco, expects the US economy to expand by 2.2% in real terms in 2018, buoyed by a strong labour market and benign inflation.
“There is good reason to expect the current expansion in the US has further to go and could actually become the longest business cycle expansion in US financial history,” Greenwood says. “This would imply a continuous upswing that exceeds the record trough-to-peak expansion of 120 months between March 1991 and March 2001.
“The only real threat to this prospect is the possibility that the Fed and other central banks could make a mistake and tighten too much during monetary policy normalisation. If they overdo the tightening, there is a real risk of a slowdown in 2018-2019 and a continuation of below-target inflation rates across many major economies. This is not my base case, but investors need to be mindful of this possibility.”
So, what of Trump’s proposed tax reforms? Mark Sherlock, lead portfolio manager of the Hermes US SMID Equity Fund, says Trump’s stalled legislative agenda may, or may not, result in tax reform or tax cuts over the next 12 months.
“While any such cuts would be beneficial for company earnings – and the amount available for reinvestment or to be returned to shareholders – expectations of success in this area remain modest,” he says.
“With regards to the market, our base case is for US small and mid-cap stocks to move up in line with earning growth. As the Fed tightens, we would expect flows into more speculative areas of the market to slow and some resurgence in the performance of ‘value’ style stocks. The portfolio retains exposure to economically sensitive sectors – such as industrials, materials – as well as the more traditionally defensive areas of the market.”
