Highlights
• We expect U.S. economic growth to accelerate even as some other areas of the world economy are fraying around the margins. Likewise, we think inflation will continue to move modestly higher.
• This should create tailwinds for stocks, but we think headwinds such as mounting trade issues need to fade before equity markets can break out of their trading ranges.
• We continue to believe equities will outperform bonds this year, but also anticipate volatility may remain relatively elevated.
So far, 2018 has been a year of contradictions. Corporate earnings growth has been stellar, yet stock prices have been stuck in a one-step-forward, one-step- back mode. Economic growth in the United States is accelerating and inflation is rising, yet bond yields remain stubbornly low. Wage growth is also struggling to move higher even as unemployment falls to its lowest level in 50 years and the Federal Reserve continues to raise interest rates. The political environment (both in the United States and around the world) remains uncertain, but has not negatively affected financial market fundamentals. Despite this confusion, the long-term backdrop still looks promising for economic growth and for equities, and we don’t believe this bull market is ending.
Mid-Year Scorecard
Prediction 1
U.S. real GDP reaches 3 percent and nominal GDP 5 percent for the first time in over a decade.
First quarter economic growth came in at a relatively slow 2.2 percent, but current expectations are for growth in the second quarter to be over 3 percent.1 We expect growth to rebound and accelerate, especially given the strength in the labor market, a tailwind from additional fiscal stimulus and rising capital expenditures. With inflation climbing modestly, we also believe that nominal growth should climb.