In a piece produced by Bank of America Merrill Lynch`s Suvita Subramanian, the market call is for the S&P 500 to rise to 3,000 by the end of the year and then fall to 2,900 by next year. The research piece calls for an inverted yield curve, and the home building market to remain weak after peaking one year ago which typically leads the equity market by 2 years. According to the piece, he states that, “assuming the market peaks somewhere at or above 3,000, our forecast is for modest downside in 2019.” The idea that stocks will stall out next year is a view that is gaining acceptance in global financial markets. And the peak in equities is now being suggested to have arrived or will arrive soon in 2019.
The inverted yield curve. An inverted yield curve refers to when the yield on short-term sovereign debt, the 2-year Treasury note, is higher than the longer dated paper such as the 10-year note, this makes the curve inverted. The inverted yield curve is typically followed by an economic recession. Many investors have been concerned about and talking openly about a recession that follows the curve inversion. The Fed now forecasts 3 rate hikes in 2019, again to pump the brakes on the economy.
Some analysts are now calling for slower growth to the 2.0 GDP range, perhaps less. Still the US economy is seeing modest growth that will fade as the tax cut benefit or sugar high fades out in early 2019. Also, there will be less spent fiscally in the US in 2019, again adding to the slower growth. And note that S&P 500 earnings were at 25 percent in the first 3 quarters of 2018, but are now expected to fade. The earnings explosion was on the back of lower corporate taxes.
The US economy is slowing and the idea of a possible recession in 2020 will be the next key topic of discussion in the coming months.