In contrast to 2017, which saw low levels of volatility in markets due to higher growth rates and strong earnings forecasts, 2018 is predicted to be "tricky" for global economies, according to a report prepared by Morgan Stanley (NYSE: MS).
"We cited low interest rate, currency, credit and economic data volatility combined with very low earnings estimate dispersion as good reason for low equity volatility, and we implored clients to embrace it rather than fear it," Mike Wilson, chief U.S. equity strategist of Morgan Stanley, said in a note Monday.
Part of the reason economic growth in the US will experience a slowdown this year is because the economy is entering into a downswing phase, as part of the economic cycle. In countries like China, which have been experiencing high levels of political uncertainty coupled with policy ambiguity, the economy is also expected to slow down.
One of the driving factors behind a less stimulated economy would be the increased interest rates, which will face higher levels of volatility as the Federal Reserve continues to raise them, the European Central Bank further implements the tapering of its quantitative easing program, and governments continue to issue more sovereign debt.
Morgan Stanley also forecasts "U.S. GDP to grow by 2.5 percent, slightly above their 2.3 percent forecast for 2017, and China's GDP to grow by 6.5 percent, below China's 2017 forecast of 6.8 percent. Sheets said emerging markets excluding China are "central to this story, and we see EM growth accelerating from 4.7%Y this year to 5.0%Y in 2018, led by Brazil and India."
An end-of-year S&P target of 2750 was also predicted, based primarily on the GOP's upcoming corporate tax cuts. This would leave companies with more disposable income for investment and growth. It could also bring the S&P 500's earnings per share would to $145.90, up from an estimated $131.60 this past year.
Meanwhile, Goldman Sachs (NYSE: GS) predicts a global growth rate of 4% next year, which would be the highest since 2011 and a 3.7% upswing from the 2017 estimate. Most major economies are even running ahead of pre-financial crisis averages, said economist Jan Hatzius in Goldman's November Economic Outlook report. The Goldman report says the projected GDP growth for next year is "notably above consensus expectations and supported by still-easy financial conditions and fiscal policy."
Core inflation is set to rise in the U.S. next year, contrary to concerns over the low inflation rate and its interaction with the Fed's monetary policy. China's inflation rate is also expected to rise to a steep 2.6%, reflective of the high growth rate in the country.
More specifically, recommendations that investors should buy energy stocks are being put out, as they have "consistently outperformed in late-cycle environments" and should dump consumer stocks, which face "poor revisions, more structural disruption and is often a late-cycle underperformer." Energy is the second-worst-performing sector in the S&P 500 in 2017, falling 10.8%. Consumer stocks, in turn, are up 14.4%.
"While it's way too early to call a recession, nor do we see one in 2018, the equity market may start to discount its arrival in the next year," Wilson said.