The bar has been lowered for U.S. stocks.
C onsensus expectations on U.S growth have already been ratcheted down over the past several months. Today, they stand at 2% for U.S. real GDP growth in 2013. As well, estimates for corporate profit growth have also been much reduced.
Indeed, stock prices have been fairly robust in the face of soft Q3 earnings announcements. This suggests that the bar has been lowered for U.S. equities to continue to rally on a cyclical basis.
As for the rest of the world, the tail risk in Europe is diminished, although expectations are that the euro zone will be in a depression for a long time and that China’s economy is badly wounded by overleveraging and overinvestment. Therefore, the bar is also fairly low for the world economy to over-deliver on growth and for companies to outperform expectations.
The major caveat to this sanguine view is that the U.S. fiscal cliff and the imminent debt ceiling confrontation in early 2013 are major sources of angst that could create substantial volatility if Washington missteps.
For now, we continue to advocate holding core positions in U.S. equities.
Stay tuned.
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