The US economy is performing strongly, but has it hit the high-water mark?
Nicholas Spiro says the US economy has looked very strong as of late, especially compared to China and Europe, but may have peaked and might be headed for choppier conditions – thanks to the escalating trade war
It took more than half a year, but by the start of this week, the benchmark S&P 500 equity index was within striking distance of its record closing high set on January 26, just days before an eruption of volatility sent US stock markets into a tailspin.
The swift recovery and strong performance of US equities has been one of the dominant themes in global markets this year.
What is more, it is not just US stocks that are performing strongly in the face of growing uncertainties.
Not surprisingly, Trump has been quick to take credit for the strong performance of the country’s economy and markets, dismissing concerns that growth and valuations have more or less peaked. In one of his countless self-congratulatory tweets, the president also singled out this year’s plunge in Chinese shares as evidence that his administration is winning the trade war.
The question is whether this is as good as it gets for US assets and whether investors should already be rotating into other regions, where valuations are much cheaper and where the risks have already been discounted.
Yet, analysts expect earnings growth to fall to 8 per cent by the end of the first half of 2019.
Put simply, the valuation premium investors are willing to pay to hold US shares is rising again – American stocks are cheaper than they were late last year but are becoming pricier relative to European and emerging market equities – despite increasing uncertainty about fundamentals, as the distorting effects of the tax cut disappear and the economy starts to slow in the coming quarters.
To be sure, the rally in US stocks almost certainly has further to run given the robustness of the economy and the strength of earnings. Yet last quarter’s 4.1 per cent GDP growth rate and 24 per cent growth in corporate profits represent a high-water mark.
From here on, the investment landscape is likely to get a lot more challenging, particularly if the trade war escalates further.
US equity bulls should be careful what they wish for.
Nicholas Spiro is a partner at Lauressa Advisory