Quarterly investment outlook
implementation guide

Apr 2, 2018
By BlackRock

The global economic expansion is rolling on. We are positive on equities but expect higher volatility and more muted returns ahead. Inflation has picked up, keeping the Federal Reserve on track to raise rates. Key risks include increasing trade tensions and a renewed spike in bond yields.

1. Room to run

The U.S. tax overhaul and spending plans have lit a fire under earnings growth, which was already gaining momentum on the back of economic strength. Dividend payouts and share buybacks are another support, particularly in the U.S. as companies look to deploy their tax windfalls.

We remain constructive on equities, despite the fact that we are nine years into a bull market.

 

2. Inflation comeback

U.S. inflation is moving back toward the Fed’s target. Yet we think it will likely take some time for any economic overheating to challenge the gradual pace of interest rate hikes. Inflation remains muted in Europe and Japan, supporting ongoing monetary policy accommodation there.

In the U.S., we expect that inflation will reach the 2% target of the Fed, and slightly above that.

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3. Reduced reward for risk

Last year was nearly nirvana for diversified portfolios. Returns were strong — and volatility was exceptionally low. Yet a mix of more muted returns and “normal” volatility challenges this dynamic.

A comeback of inflation and Fed normalization may create a challenge for investors looking for high risk-adjusted returns.

Is the U.S. leading a new market regime?
In our latest podcast, Richard Turnill explores the shift in economic momentum from global to domestic, and what this might mean for markets.
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