The stock market surged during the first half of 2019, but the outlook is bleaker for the remainder of the year, according to John Higgins, Capital Economics’ chief markets economist.
“We forecast that the S&P 500 (^GSPC) will fall by another 15% or so between now and the end of this year, as investors’ lofty expectations for earnings are dashed by continued sluggish growth in the U.S. and elsewhere, which won’t be helped by an escalating trade war,” Higgins wrote in a note to clients on Monday.
As of Monday, the S&P 500 was up roughly 14% for 2019.
The stock market has been on a steady decline since President Trump’s tweet last Thursday, announcing a 10% tariff on the remainder of imports from China starting on September 1.
The selloff continued Monday with China responding by letting its yuan (CNYUSD=X) fall.
“China’s retaliation has already provoked a hostile response from the U.S. president,” Higgins wrote, referring to Trump’s Monday tweet calling the yuan devaluation a “major violation.” “So we think that investors are right to mark down the prices of global equities in the expectation of a further escalation of the trade war.”
Federal Reserve outlook
With the latest escalation of trade tensions, investors are now pricing in a 100% chance that the Fed cuts interest rates at its next meeting in September, according to CME data. The probability of a 50bp cut in September is now over 18%. The Fed just cut interest rates by 25bp last Wednesday for the first time in almost 11 years.
But Capital Economics isn’t expecting as much stimulus from the Fed.
“We don’t expect the Fed to loosen policy by as much as investors are now envisaging,” Higgins wrote. “On the assumption that the U.S. economy doesn’t fall into a recession, our projection remains that the central bank will only reduce its policy rate by another 50bp, between now and next spring. Investors, by contrast, think that it will be cut by about 75bp before then and by another 25bp later in 2020.”
Scott Gamm is a reporter at Yahoo Finance. Follow him on Twitter @ScottGamm.
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