Expect market volatility to pick up if/when the Fed decides to press too hard. In a slower growth environment investors are likely to continue to favor true growth companies. Market leadership could shift to the more value-oriented, cyclical segments of the market if fiscal stimulus is successful.

Alas, fiscal stimulus at this stage of the cycle is unlikely to lead to sustained higher growth. Europe and Japan, in a year or two’s time, may be dealing with the same issues as in the U.S. (tightening policy, aging credit cycle), but for now are the beneficiaries of positive credit growth and rising earnings.

We are not there yet. In 2018 the cycle will continue but the risks are rising. Equities, globally, continue to be the asset class of choice.

Three Scenarios With Distinct Probabilities

The broad equity market has surged to new highs over the past eight years but with the inevitable fits and starts and divergent market leadership at different points in the cycle. There are three primary scenarios for 2018 with distinct probabilities:

A more hawkish Fed could repeat the mistakes of early 2016 and risk curtailing the cycle. (Low probability)
Corporate tax cuts could sustain U.S. growth at a higher level, supporting the more cyclical segments of the U.S. market. (Low probability)

We believe the highest probability is a continuation of the market leadership of 2017. Economic growth is likely to be deepest and broadest in the emerging markets, a trend that also favors.

For the U.S., the prospect of fiscal stimulus looms but a sustained shift to higher trend growth is unlikely with the economy already close to full employment. Our base case outlook calls for continued moderate U.S. growth, a trend that would continue to favor growth strategies in the U.S.

The following post is republished with permission from Oppenheimer Funds.

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