Resilient earnings expectations in developed international markets. In an environment where U.S. earnings have generally paced the globe, 2019 earnings estimates for the MSCI EAFE Index-mostly Europe with much of the rest in Japan-have actually held up better than those in the U.S. and emerging markets (EM)recently. Over the past month, despite heightened concerns about global growth, EAFE estimates have risen modestly (+0.2%), while S&P 500 Index and MSCI EM Index estimates have each fallen by 2% or more. Considering European data continues to miss expectations, this is an encouraging sign, even though we still do not believe relative valuations support investing in Europe over the U.S.
Global earnings expectations have converged. Though earnings growth is expected to be stronger in the U.S. and EM in the coming year, that gap has closed, with 6% expected in developed international markets, 7% in the U.S., and 8% in EM, according to FactSet estimates. Still, better economic growth outlooks and valuations support our continued preference for U.S. and EM in global equity allocations.
FOMC minutes sound more dovish tone. The minutes from last month’s monetary policy meeting showed that officials’ views are turning more cautious, citing market volatility and heightened concerns over global growth. Although there was general agreement that the U.S. economy is evolving as expected and further gradual rate hikes would be appropriate, the central bank could be more patient about tightening. This aligns with the expectations we laid out in our Outlook 2019: FUNDAMENTAL, and several regional Federal Reserve Bank presidents, in speeches yesterday, echoed the dovish shift in perspective.
Can the U.S. economy handle rising rates? There has been a lot of debate recently about the U.S. economy’s ability to withstand rising interest rates. However, current interest rates are historically low relative to the robust gross domestic product growth we’ve seen recently.