Mid-Year Outlook 2018: Is this The End of “Easy”?

Market Outlook: July 2018


The global economy remains on track, but appears a bit less synchronized. Growth in Europe has failed to match elevated expectations while the U.S. economy looks set to receive a boost from fiscal stimulus. Overall, Citi’s economists expect the global economy to advance by about 3.4% over the next two years. The word recession is not yet in our vocabulary.

We think that the bull market remains intact, but that the easy returns witnessed in 2017 will be difficult to repeat. Citi’s strategists believe that global equities could return an additional 9% by mid-year 2019 with the U.S. returning about 5%-6% when dividends are included (Citi’s mid-year 2019 target for the S&P 500 is 2,865). Citi Private Bank’s Global Investment Committee maintains a preference towards Europe ex United Kingdom, Japan, and Emerging Markets due to lower valuations. Citi maintains a neutral stance on U.S. shares.

Developed market central banks are beginning to shift away from easy monetary policy with the Federal Reserve leading the charge. Even though the Fed has recently signaled two additional rate hikes this year, Citi is still predicting just one more rate hike as subdued inflation creates little urgency for the central bank to accelerate their gradual pace. Citi Private Bank’s fixed income preferences remain slanted towards U.S. high yield, U.S. municipals, and emerging market debt. Short-term U.S. Treasuries also appear to be a better alternative than simply holding cash.

While maintaining a positive outlook for risk assets in 2018, we would not be surprised to see further volatility. Global earnings growth is likely to serve as a solid underpinning to equity markets this year with U.S. earnings-per-share (EPS) on track to rise about 20% this year. However, mid-term elections in the U.S., rising interest rates, trade tensions, and geopolitics could each serve as catalysts for further volatility. Importantly, intra-year declines often tell us very little about how the year will end and bear markets are uncommon outside of recession.