5. Non-U.S. growth, however, appears to be decelerating. The Index of Leading Economic Indicators is gaining strength in the United States, but appears to be slowing in most of the rest of the developed world.4

Improving economic growth should favor cyclical market sectors

Markets have continued to churn in recent months and remain range bound, but the corporate earnings picture has been stellar. While much attention has been focused on the positive effects from corporate tax cuts, revenues have also been advancing strongly. The year-over-year revenue growth rate topped 8 percent in the first quarter. We expect corporate earnings growth to moderate later this year or early next year, but strong corporate earnings should remain as an important tailwind for stock prices as long as the global economic expansion continues.

At the same time, however, a number of risks are holding markets back. These include renewed concerns about growing trade protectionism that manifested last week, as well as the sort of political uncertainty from Italy that dominated last week’s headlines. The on-again-off-again summit between the United States and North Korea also looms large and has been contributing to market volatility. From a more fundamental economic perspective, investors are worried about rising interest rates and inflation, Federal Reserve policy and signs that global growth might be decelerating.

Over the near term, we expect markets to remain in their current churning phase as investors digest these broad macro risks. We believe investor confidence should regain traction in the months ahead, and expect an important inflection point could occur if and when global economic indicators bottom and start to pick back up.

As a result, we believe equities will eventually break out of their trading ranges to the upside and expect stock markets will enjoy another sustained advance. Cyclical market sectors have been generally outperforming defensive areas. Defensive sectors could experience a near-term catch-up phase. But given our view that the global economic expansion still has legs, we think it makes sense for investors to stick with a pro-growth stance that favors cyclicals over defensives.

Robert C. Doll is senior portfolio manager and chief equity strategist at Nuveen Asset Management.

1 Source: Morningstar Direct, Bloomberg and FactSet
2 Source: Source: Bureau of Labor Statistics
3 Source: Comerce Department
4 Source: Conference Board

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