Leaving aside the national political risk, where everything indicates that after the legislative elections last Tuesday it is likely that the Capitol will invite a legislative blockade for the next two years, investors set their sights on issues such as the Federal Reserve rate hikes , inflation or the trade war with China. Factors shaping their forecasts for the coming year.
Consensus estimates that average earnings per share for S&P 500 components will grow 8% next year, down from the 23% expected this year. From S&P Global Market Intelligence they place the advance for 2019 at 8.4% while in the case of Goldman Sachs they reduce it to 7%.
With the S&P 500 expected to touch 3,100 in the next 12 months, there is some conviction that the bullish trend will blow its 10th anniversary at a time when the factors that have driven US equities this year still leave little to be desired. notice its effect, although with less verve.
Among them, the tax reduction stands out above all as part of the tax reform approved on December 22, 2017, which indefinitely reduced corporate tax to 21% from 35%. In addition, US companies were also encouraged to repatriate profits and cash abroad.
All of this has prompted the repurchases of own securities by many entities. Only in the current year these operations are expected to register an increase of 44%, according to estimates from Goldman Sachs. Precisely this has become the pillar on which the stock market rebound this year is sustained. For next year, repurchases are expected to increase by 22% to $940 billion.
Even so, after the debacle in October, some analysts have begun to sound the alarm. From Morgan Stanley, its strategist, Mike Wilson, recently warned that “there is increasing evidence that the current situation could turn into a full-blown bear market.”
Morgan Stanley is concerned that actions by the Federal Reserve and other central banks are draining liquidity more than most market participants have estimated, putting equities in an awkward spot. The Fed has raised interest rates three times this year and is expected to do so again in December.
Now the sights are focused on the next year. In its last monetary policy meeting this week, the Federal Open Market Committee (FOMC for its acronym in English) pulled from its classic manual to warn of “upcoming gradual increases” but the unknown at the moment is where the issuing institute is looking the top of its current bullish cycle.
As the economy takes its toll from fiscal stimulus and labor costs begin to bite profit margins, investors are only pricing in two rate hikes of 25 basis points each next year, possibly on March 20. and June 19.
In this way, the investment desks are considering that the rate target would be in a range of 2.75% and 3%. A level that some of the members of the Fed, especially those who advocate a more restrictive monetary policy, would have to be exceeded, which would imply raising rates at least three times in 2019.
An expectation that still has not finished sinking. “We expect two rate hikes in the first half of 2019. However, by the middle of next year, we expect economic growth to slow below its potential pace, which would force the Fed to stop its bullish policy,” it highlighted. Michal Pearce, economist at Capital Economics, on Wednesday after the FOMC decision was published.
Not everyone considers this scenario. Jay Hatzius, economist at Goldman Sachs, expects the unemployment rate to fall to 3% in 2020 and that the Fed will implement another five 25-basis-point hikes, including the one investors are already discounting for mid-December. Two more than those digested by the market.
“The economy really needs to slow down to avoid dangerous overheating,” Hatzius wrote in a report distributed to his clients. “Inflation is on track to exceed the 2% objective of the central bank,” warned this expert, especially referring to the rise in wages, which could grow at a rate of between 3.25% and 3.5% during the next year.
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