5. Earnings results are clearly skewing toward domestically focused companies and cyclicals. These areas of the market have been outperforming companies with more international exposure and defensive sectors.
6. Trade uncertainty remains high, but President Trump is pushing hard for some sort of deal. The president appears highly focused on finding a way to both boost economic growth and his approval ratings. A trade deal seems to be a clear path toward accomplishing both.
7. The trend of value stocks outperforming growth could still have legs. Positive economic momentum, central bank easing and the prospects for a trade agreement could benefit value stocks.
What would it take for stocks to break to new ground?
Despite the good news that has pushed stock prices higher since September, equity markets have yet to break out above their July highs. Our sense is that investors remain wary about economic growth and are concerned that corporate earnings expectations remain too high for next year. Economic data has picked up over the last couple of months, but has not notably strengthened. In other words, we’re not seeing as many disappointing numbers but nor are we seeing a rash of positive surprises. Manufacturing remains critical to the outlook, and those numbers still appear troubled. It will take more than a couple of months of decent data before global manufacturing can recover.
Global monetary policy also looks to be a key economic factor. The odds are high that the Fed will cut this week, but we don’t expect a prolonged campaign of interest rate cuts. The good news is that rates are already quite low, so a sustained pause should be enough to keep the expansion on track.
Our outlook for corporate earnings is a bit more troubled. We think earnings will continue to slide and the risk is high for disappointments in 2020. Additional progress on the trade front and/or better news from the manufacturing sector would help improve the corporate earnings outlook, but both of those trends appear elusive at best.
In this environment, we think markets will remain range bound. But if the economy picks up a bit, we think the recent trend of value and cyclical stocks outperforming growth and momentum could continue for a while. We also think some areas of the global stock market (such as emerging markets) could be better positioned than their U.S. counterparts.
Robert C. Doll is chief equity strategist and senior portfolio manager at Nuveen.