• We are trimming our forecasts for S&P 500 earnings to 3-5% earnings growth
  • Despite uncertainty from Brexit, U.S. equities remain a relative haven of safety
  • We expect total returns of 4-5%

Due to increased political uncertainty in Europe stemming from Brexit and yet-to-be-determined details of the future relationship between the UK and the EU, prospects for modestly slower economic growth in the EU have increased. Consumers and corporations are likely to step back and reassess spending plans, particularly for big-ticket items. In addition, demand for safe haven assets such as the U.S. dollar is likely to remain strong. This would create a headwind for earnings at multinational companies. While the U.S. economy appears on track for continued GDP growth of around 2%, the slower global growth outlook and stronger dollar prompt us to trim our EPS growth outlook for the S&P 500 from 4-5% to 3-5% through 2017. This stands in contrast to EPS estimates for the EU, which were flat heading into Brexit and are now likely to slip into negative territory.

Equity markets do not like uncertainty. When uncertainty rises it tends to have a dampening impact on economic activity, earnings growth, demand for equities and PE multiples. Brexit is an unprecedented political event that introduces a new level of uncertainty. Foremost among these is the timing and detail of the “divorce negotiations” between the EU and the UK and how they may impact trade and economic activity. These negotiations are likely to stretch out for several years and produce only a modest slowdown in European growth – from 1.5% to 1%. Therefore, the level of uncertainty created from Brexit appears to be meaningfully less than the global GDP growth scares of August 2015 and January 2016. In addition, volatility associated with Brexit is likely to be more subdued. Nevertheless we will remain watchful as the situation unfolds, staying alert for potential negative feedback loops that could impact the broader European financial system.

All returns cited are in USD. Index returns include the reinvestment of dividends.


Important Disclosures

The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. This presentation is not an offer to buy or sell, or a solicitation of any offer to buy or sell, any of the securities mentioned herein.

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 on the date of this document and are subject to change.

There are inherent risks with equity investing. These risks include, but are not limited to, stock market, manager, or investment style. Stock markets tend to move in cycles, with periods of rising prices and periods of falling prices. Investing in international markets carries risks such as currency fluctuation, regulatory risks, economic and political instability. Emerging markets involve heightened risks related to the same factors as well as increased volatility, lower trading volume, and less liquidity.  Emerging markets can have greater custodial and operational risks, and less developed legal and accounting systems than developed markets.

Concentrating assets in the real estate sector or REITs may disproportionately subject a portfolio to the risks of that industry, including the loss of value because of adverse developments affecting the real estate industry and real property values. Investments in REITs may be subject to increased price volatility and liquidity risk; concentration risk is high.

There are inherent risks with fixed income investing. These risks may include interest rate, call, credit, market, inflation, government policy, liquidity, or junk bond. When interest rates rise, bond prices fall. The yields and market values of municipal securities may be more affected by changes in tax rates and policies than similar income-bearing taxable securities. Certain investors’ incomes may be subject to the Federal Alternative Minimum Tax (AMT) and taxable gains are also possible. Investments in below-investment-grade debt securities and unrated securities of similar credit quality, commonly known as “junk bonds” or “high-yield securities,” may be subject to increased interest, credit, and liquidity risks.

Investments in emerging markets bonds may be substantially more volatile, and substantially less liquid, than the bonds of governments, government agencies, and government-owned corporations located in more developed foreign markets.  Emerging markets bonds can have greater custodial and operational risks, and less developed legal and accounting systems than developed markets.

As with any investment strategy, there is no guarantee that investment objectives will be met, and investors may lose money.

Returns include the reinvestment of interest and dividends.

Investing involves risk, including the loss of principal. Diversification may not protect against market loss or risk.

Past performance is no guarantee of future performance.

Index Definitions

The Standard and Poor’s 500 Index (S&P 500) is a market capitalization-weighted index of 500 common stocks chosen for market size, liquidity, and industry group representation to represent U.S. equity performance.

The U.S. Treasury 10 year note is a debt obligation issued by the United States government that matures in 10 years. A 10 year Treasury note pays interest at a fixed rate once every six months and pays the face value to the holder at maturity.

The MSCI World Index captures large and mid-cap representation across 23 Developed Markets countries.

The Barclays U.S. Corporate High-Yield Index covers the U.S. dollar denominated, non-investment grade, fixed rate, taxable corporate bond market and includes securities with ratings by Moody’s, Fitch and S&P of Ba1/BB+/BB+ or below.

The Barclays Emerging Markets USD Aggregate Bond Index is a flagship hard currency Emerging Markets debt benchmark that includes fixed and floating-rate U.S. dollar denominated debt issued from sovereign, quasi-sovereign, and corporate EM issuers.

The Bloomberg CFETS RMB Index is an index replica of the trade weighted CFETS RMB Index, which tracks the yuan against 13 currencies.

The U.S. Dollar Index is an index (or measure) of the value of the United States dollar relative to a basket of foreign currencies.

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