We do not believe that the basic macroeconomic backdrop has changed very much from last quarter. In other words, the U.S. economy will continue to lead the rest of the world, and the Fed will continue to be ahead of other central banks in terms of monetary renormalization. The only difference here is that China is joining Europe and Japan in easing monetary policy, which should be regarded as a welcome move by stock markets around the world.
As far as the U.S. stock market is concerned, there are two sets of factors that need to be considered. On one hand, corporate earnings will rebound alongside a strengthening economy. On the other hand, we remain wary of events unfolding in the Eurozone’s periphery.
The current ISM (Institute for Supply Management) is consistent with sales growth of close to 10% for the S&P 500 companies.
Pessimists would say that stocks are already fully priced, if not bordering on overvaluation. There-fore, they are vulnerable to any development that is deemed “less good” by the market. In this vein, there are plenty of potential worries that can spook the market, including possible monetary tightening by the Fed, a dollar overshoot that undercuts profit expectations for the U.S. corporate sector, and a possible renewed fallout in the euro zone economy.