Our flagship publication, Economics for Investment is just released to clients. It uses our SOLVER model to assess the economic outlook and draw out investment implications (Stage of the cycle, Outlook, Leading Indicators, Valuations, Expectations and Risks).
With the US economy booming alongside high confidence while other major countries struggle, alongside low confidence, we look at the likely implications of President Trump's policy mix. We expect it to be broadly positive for the US economy, though it may be a rougher ride than some hope, while tariffs may further hurt confidence in other countries especially at first.
A crucial question remains inflation. Tariffs will make it worse everywhere but we believe that the underlying direction for inflation is down in the Western countries which should allow for lower interest rates this year. That said, we see little downside in the Federal Funds rate as, contrary to Fed Chair Powell, we do not see the current level as restrictive.
In Japan, inflation finally seems to have come up to 2% as targeted which allows for a normalisation of policy. We remain pessimistic however, about prospects for China which is dealing with major balance sheet restructuring in the aftermath of the property crash. In our view the already-high debt levels in the economy leave only limited room for new fiscal stimulus so we expect continued slow growth.
The Focus this quarter looks in detail at trends in S&P500 earnings and valuations. Valuations are high for the US, whether compared with its history or other countries. This is based on the rapid earnings growth in recent years and expectations for continuing rapid growth. There is inevitably a question mark over future prospects especially as a significant reason for the recent fast growth was an expansion of margins, which may not be repeatable.
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