Source: New York Life Investments Multi-Asset Solutions team, Bloomberg, S&P, Bureau of Economic Analysis As of 10/15/19.
Unsurprisingly, small-cap earnings are fading. Reported profits are down nearly 9% on a trailing basis – the worst decline of this cycle. We expect declines to continue based on current economic fundamentals.
The Fed is lowering rates, won’t that help?
We are skeptical that lower interest rates will be able to further support equity valuations or spur a significant pickup in growth. This is in part because interest rates are already low, and because we don’t expect bond yields to fall significantly further without a catalyst. That means that any weakness in forward S&P 500 is likely to prompt a decline in the index’s price to earnings ratio.
Investors’ continued optimism about corporate earnings for the S&P 500 doesn’t fit with our take on the weak global economic picture and the broader late cycle corporate profit trends. This is the key reason why we continue to think U.S. equities will face more trouble before the end of the year.
In our portfolios we have reduced equity exposure, favoring investments less exposed to wage pressures, global trade disruption, and manufacturing weakness. These investments tend to be in defensive (non- cyclical) sectors. They also tend to be higher in quality with strong balance sheets and stable earnings growth.
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