The new year has brought several fresh stock market milestones. On 4 January, the Dow Jones Industrial Average closed above 25,000 for the first time, following the S&P 500’s move above 2,700 and the Nasdaq Composite’s breach of 7,000 earlier this week.
Equity gains have prompted talk that markets are entering a “melt-up” or blow-off phase. We expect the pace of gains to moderate compared with last year. But investors can still expect positive returns:
- The economic backdrop remains supportive. We estimate global GDP growth was 3.8% in 2017 , and will reach 3.9% in 2018. Economic momentum appears strong coming into 2018, with PMI indicators at very strong or record levels in several developed and emerging market economies.
- Corporate profit growth is likely to be good. US tax reform contains net tax cuts of about USD 580bn (3% of GDP), and we have increased our GDP growth forecast to 2.4%, from 2.2%, for 2018. With tax benefits included, we now forecast S&P 500 earnings per share to rise by 15% in 2018. We expect Eurozone and emerging market earnings to grow by 9–12%.
- The global monetary policy backdrop will remain supportive. Central banks will remain net suppliers of liquidity to the global financial system until around September 2018. Uncertainty remains over whether the Federal Reserve will hike twice or three times this year, but in either case this pace of tightening is unlikely to unsettle equities.
Against this favorable backdrop, we expect global equities to deliver returns of roughly 6–8% this year, and we remain overweight.
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