5. Corporate earnings expectations for 2019 may be too high. Current consensus expectations are for revenues to grow 5 percent and earnings 10 percent.3 We think those numbers are too high and anticipate earnings growth of around 6 percent at best.
We See More Upside Price Potential For Stocks Than Bonds
Two months ago, the financial market backdrop darkened considerably. Worries about economic growth mounted, the Fed indicated that rates may climb more than expected, bond yields rose with the 10-year Treasury yield hitting 3.25 percent and the U.S./ China trade dispute threatened to escalate into an all-out trade war.1 Geopolitical risks also rose with Brexit looking messier and the budget fight between Italy and the EU worsening. These issues caused global equity markets to sink, with most regions experiencing double-digit price declines. Oil prices also plummeted, which further impaired fixed income credit markets.
We have seen these sorts of downturns occur before in the current bull market. Market weakness was pronounced in 2015, followed by a strong risk-on phase in 2016 and 2017. History is an imperfect guide, but we wouldn’t be surprised to see somewhat better sentiment in the months ahead and at least a modest rebound in risk assets. Still, any sustained climb would require better economic data from outside the United States and/or more progress on the trade front.
Over the near term, we expect markets to remain relatively volatile, but we see some silver linings. For one, equity valuations are more attractive now thanks to a combination of lower prices and positive earnings. Secondly, the market turmoil has helped put at least a temporary cap on bond yields.
Over the longer-term, we think bond markets will remain subject to downward price pressures, as a number of factors are conspiring to push yields higher. For stocks, we think the economic and earnings growth environment will be tougher next year, but should be sufficient to provide some tailwinds. Additionally, there is now a lower bar for positive earnings surprises, which could provide room for valuation multiples to expand.
Robert C. Doll is chief equity strategist and senior portfolio manager for Nuveen.
1 Source: Bloomberg, FactSet and Morningstar Direct
2 Source: Bureau of Economic Analysis
3 Source: ISI Evercore Research