We See Several Key Risks, But The Macro Backdrop Suggests Equities Could Climb Further

Equity markets and bond yields have been rising, as economic data has been decent (if not great). Investors are becoming more convinced that recession fears are easing, given decreasing trade tensions, growing indications that tariffs may be rolled back and stabilizing manufacturing. These trends also seem to reflect a more equity-friendly political environment. President Trump has been adopting a less-aggressive tone toward trade issues, as he seems to be acutely aware of the need to try to promote economic growth and a solid market environment in the run-up to the 2020 elections.

A number of risks remain on the horizon. Manufacturing continues to be dicey. Only outright improvement, not just data stabilization, would convince us that manufacturing is out of trouble. The earnings backdrop also presents some risks. Expectations for next year may still be too high, although we could see some improvements if economic growth continues to pick up. Additionally, in the near-term, market conditions may have become overbought from a technical perspective, which could mean some sort of corrective action.

On balance, we think that as long as trade tensions do not significantly flare up again, equity prices can continue to grind higher while bond yields are likely to advance. Should this happen, we think we could see a continued rotation toward cyclical sectors of the U.S. market.

Additionally, we could see better performance from non-U.S. stocks. Non-U.S. markets are looking more interesting from a valuation perspective, especially since U.S. markets are again at or near all-time highs, while other markets remain below their early-2018 peaks.

Robert C. Doll, CFA, is chief equity strategist and senior portfolio manager at Nuveen.


1 Source: FactSet, Morningstar Direct and Bloomberg
2 Source: Institute for Supply Management
3 Source: Bank of America Merril Lynch Research

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