The United States, Europe, and emerging market nations are experiencing a coordinated period of expanding economies, rising corporate profits, advancing wages, moderate inflation, and low interest rates. The result has been rising equity markets around the world, with 19 of the top 20 global markets generating positive returns this year.

Given that stock markets are good indicators of future economic activity and corporate profit trends, we expect a continuation of global growth well into 2018. This global expansion generates a reinforcing cycle, with rising corporate profits encouraging businesses to add employees and invest in their industry-specific technologies. In turn, this drives continued rising incomes for consumers and improved productivity for the economy.

Figure 1

MSCI Index

The U.S. equity market correctly anticipated this positive outlook by producing a very strong year-to-date total return of 10.3%. Similarly, the pan-European STOXX Europe 600 equity index has generated a year-to-date total return of 5.8% (in Euro local currency). Accounting for the weakness in the dollar, returns for U.S. investors are 15.9%.

The U.S. economy is generating balanced, moderate growth with low inflation, although some areas are showing flattening trends that indicate they are nearing their potential maximum levels of expansion after a long period of growth. Assuming no policy mistakes by the Fed, which is proceeding very cautiously, or major disruptions on the geopolitical front, it appears that domestic economic growth can continue well into 2018.

As the consumer goes, so goes the U.S. economy. Workers have been experiencing average wage increases of 2.0% to 2.5% this year, with expectations of 2.5% to 3.0% growth in 2018. With consumer sentiment at high levels, wages growing, and job creation strong, we believe domestic economic growth trends are supported by strong fundamentals.

Figure 2

Average Hourly Wage

Underpinning the ascent of the markets this year has been the strong improvement in S&P 500 quarterly earnings. As Figure 3 shows, S&P 500 companies resumed their strong growth trajectory in the first quarter, and we expect earnings growth of approximately 10.0% for the second quarter. For the second half of 2017, we are projecting S&P 500 earnings growth of approximately 6.0% to 8.0%.

Equities have responded appropriately to the growth of U.S. and global economies, accompanied by moderate inflation and interest rates. We believe the strong year-to-date returns for the S&P 500 have been justified, but we also view equities as currently fully valued.

Going forward, we are modestly trimming our expected returns for both large cap growth and high-dividend equities to about 5.0% to 7.0%. Given high valuations and muted EPS outlook, small cap growth equity returns are expected to be only 4.0% to 5.0%. On the fixed income side, high-yield investments have returned between 5.0% and 7.0% (year to date as of August 15, 2017*) and we believe are now fully valued. Reflecting our forecast of moderately rising rates ahead, we are modestly trimming our projected future returns for high yield to 5.0% to 6.0%.

In summary, there are few compellingly valued asset categories, whether we look at equities or fixed income. Given the recent appreciation of equities, we think it is wise to proceed cautiously in terms of initiating new positions in the U.S. and global markets.

*Year to date returns are based on the Bloomberg Barclays U.S. Corporate High Yield Bond and JPMorgan CEMBI Broad Diversified High Yield indices.

Figure 3

S & P Quarterly EPS Growth

Important Disclosures

The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice.

Certain statements contained herein may constitute projections, forecasts, and other forward-looking statements, which do not reflect actual results and are based primarily upon a hypothetical set of assumptions applied to certain historical financial information. Certain information has been provided by third-party sources and, although believed to be reliable, it has not been independently verified and its accuracy or completeness cannot be guaranteed.

Any opinions, projections, forecasts, and forward-looking statements presented herein are valid as of the date of this document and are subject to change.

All investing is subject to risk, including the possible loss of the money you invest. As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money. Diversification does not ensure a profit or protect against a loss in a declining market. Past performance is no guarantee of future performance.

This material is available to advisory and sub-advised clients of City National Rochdale, LLC, a Registered Investment Advisor and a wholly owned subsidiary of City National Bank.

 

Index Definitions

The S&P 500 is a stock market index that tracks the 500 most widely held stocks ​on the New York Stock Exchange or NASDAQ.

With a fixed number of 600 components, the STOXX Europe 600 Index represents large, mid, and small capitalization companies across 17 countries of the European region.

The Bloomberg Barclays U.S. Corporate High Yield Bond Index is a market value-weighted index which covers the U.S. non-investment grade fixed-rate debt market. The index is composed of U.S. dollar-denominated corporate debt in Industrial, Utility, and Finance sectors with a minimum $150 million par amount outstanding and a maturity greater than 1 year. The index includes reinvestment of income.

J.P. Morgan CEMBI Index tracks U.S. dollar-denominated debt issued by emerging market corporations.

The MSCI China Index captures large and mid-cap representation across China H shares, B shares, Red chips, P chips and foreign listings.

The MSCI Spain Index is designed to measure the performance of the large and mid-cap segments of the Spanish market.

The MSCI Korea Index is designed to measure the performance of the large and mid-cap segments of the South Korean market

The MSCI Netherlands Index is designed to measure the performance of the large and mid-cap segments of the Netherlands market

The MSCI India Index is designed to measure the performance of the large and mid-cap segments of the Indian market.

The MSCI Hong Kong Index is designed to measure the performance of the large and mid-cap segments of the Hong Kong market.

The MSCI Italy Index is designed to measure the performance of the large and mid-cap segments of the Italian market.

The MSCI Taiwan Index is designed to measure the performance of the large and mid-cap segments of the Taiwan market.

The MSCI France Index is designed to measure the performance of the large and mid-cap segments of the French market.

The MSCI Sweden Index is designed to measure the performance of the large and mid-cap segments of the Swedish market.

The MSCI Switzerland Index is designed to measure the performance of the large and mid-cap segments of the Swiss market.

The MSCI Germany Index is designed to measure the performance of the large and mid-cap segments of the German market.

The MSCI Brazil Index is designed to measure the performance of the large and mid-cap segments of the Brazilian market.

The MSCI South Africa Index is designed to measure the performance of the large and mid-cap segments of the South African market.

The MSCI United Kingdom Index is designed to measure the performance of the large and mid-cap segments of the UK market.

The MSCI Australia Index is designed to measure the performance of the large and mid-cap segments of the Australia market.

The MSCI Japan Index is designed to measure the performance of the large and mid-cap segments of the Japanese market.

The MSCI USA Index is designed to measure the performance of the large and mid-cap segments of the US market.

The MSCI Canada Index is designed to measure the performance of the large and mid-cap segments of the Canada market.

The MSCI Russia Index is designed to measure the performance of the large and mid-cap segments of the Russian market.

Indices are unmanaged and one cannot invest directly in an index. Index returns do not reflect a deduction for fees or expenses.

 

Non-deposit Investment Products: ▪ ARE NOT FDIC INSURED ▪ ARE NOT BANK GUARANTEED ▪  MAY LOSE VALUE