Beige Book: Window on Main Street

The latest edition of the Federal Reserve’s (Fed) Beige Book, released Wednesday, January 17, 2018, continued to deliver a positive view of the U.S. economy. The Beige Book is a qualitative assessment of the domestic economy and each of the 12 Fed districts individually. The report is prepared eight times per year, ahead of each Federal Open Market Committee (FOMC) meeting — the next of which is set to take place from January 31 to February 1, 2018. We believe that the Beige Book is best interpreted by measuring how key words change over time. The qualitative inputs for the January 2018 Beige Book were collected in the weeks prior to January 8, 2017.

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Fourth Quarter Earnings Season

It’s early in the season, but with about 50 companies having reported fourth quarter results, S&P 500 Index earnings are tracking a 12% yearover-year increase [Figure 1]. A solid 79% of the companies have bested earnings estimates, while 87% have topped revenue targets, both well above recent and long-term averages. In this week’s commentary, we preview fourth quarter earnings season and reiterate our optimism for corporate profits in 2018.

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Global Growth Expected to Continue in 2018

Global economic growth exceeded expectations in 2017, and we expect another strong year in 2018. The Citi Global Economic Surprise Index, which was well above zero for most of the second half of 2017, signaled that global economic data was exceeding expectations [Figure 1]. Drivers of strong global performance in 2017 included steady growth in the United States, better-than expected economic data in Europe, continued positive performance from Japan, and stabilization in China following several years of deceleration.

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Global Equity Market Outlook

We favor U.S. and emerging market (EM) equities for tactical global allocations. After reviewing our thoughts on the U.S. equity markets in last week’s Weekly Market Commentary, we thought we’d expand our 2018 equity outlook with a focus on global markets. As discussed in our Outlook 2018: Return of the Business Cycle publication, from a regional perspective, we favor the U.S. and EM over developed foreign markets broadly, although the improving outlook in Japan is noteworthy.

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Investment Implications of the New Tax Law: Equities at a Glance

As we wrote in our Outlook 2018, corporate profitability will likely be a significant beneficiary of any meaningful change in the corporate tax rate. Indeed, the reduction of the corporate tax rate from 35% to 21%, combined with businesses’ ability to fully expense their capital expenditures for the next five years, are powerful potential tailwinds for profits, which have already enjoyed a renaissance in 2017, powered by improved domestic and global demand. We believe this will help elongate the expansion, which has thus far been powered by the U.S. consumer. Going forward, we look for business investment and further gains in corporate earnings per share (EPS) to power the economy and equity markets.

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Economy at a Glance

After more than a year of political posturing and investor anticipation, Congress finally approved a $1.5 trillion tax cut, the most sweeping U.S. fiscal overhaul since 1986. The 2017 Tax Cuts and Jobs Act was signed into law by President Trump on December 22, 2017, meeting his pledge to deliver tax reform before Christmas. The complex 1,000-page bill features changes that are intended to spur economic activity through a reduction in both individual and corporate tax rates, and simplify the tax code by eliminating or trimming a variety of deductions and exemptions. In this week’s commentaries, we look at the likely impact of the final bill on the economy, monetary policy, and the financial markets in the coming years.

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