Key Points

• Global monetary policy remains equity friendly, but policy is no longer sufficient to drive equity returns.
• We believe the global economy and corporate earnings should improve modestly, if unevenly.
• Equities should grind higher over the coming year, but selectivity is growing in importance.

The Monetary Policy Tailwind May Be Fading

During the height of the financial crisis, the Federal Reserve and other central banks stepped in to stave off complete global financial catastrophe. In the ensuing recovery, monetary policy has remained extremely accommodative and been largely responsible for an equity bull market that is nearly eight years old.

For now, monetary policy continues to be a driving force behind equity market performance. Policy alone, however, cannot produce a self-sustaining economic expansion or restore financial imbalances. Something needs to change.

Policymakers may have exhausted their playbooks by this time and are running out of ways to stimulate growth and provide financial stability, meaning the end of the easing era may soon be upon us. We do not expect imminent near-term shifts in global policy, and policy isn’t going to become equity unfriendly any time soon, but further significant gains in equity prices will require something else.

Economic and Earnings Growth Remain Critical

That something else is likely to be accelerated global economic growth and a corresponding earnings recovery.

Over the next year, we expect a gradual and broadly improving global growth trajectory, led by U.S. consumers and a revival in U.S. imports. The jobs market remains on track and incomes are rising, which should boost consumer spending. Summer retail sales were lackluster, but we expect better results ahead. Likewise, manufacturing data will likely improve. Outside of the United States, growth remains relatively weak. A revival in global trade would go a long way toward lifting global growth expectations.

At the same time, we anticipate that corporate earnings results should improve modestly. Given relatively soft growth and the oil/dollar headwind, corporate earnings struggled through most of 2015 and early 2016. We are starting to see a turnaround, however. After a long recession in earnings, S&P 500 earnings-pershare growth was up 1% in the second quarter, excluding energy.1 That’s a good sign and augers well for results in the coming quarters.