JPMorgan's Outlook For 2018: "Eat, Drink And Be Merry, For In 2019..."

While the prevailing outlook by the big banks for 2018 and onward has been predominantly optimistic and in a few euphoric cases, "rationally exuberant", with most banks forecasting year-end S&P price targets around 2800 or higher, and a P/E of roughly 20x as follows...

  • Bank of Montreal, Brian Belski, 2,950, EPS $145.00, P/E 20.3x
  • UBS, Keith Parker, 2,900, EPS $141.00, P/E20.6x
  • Canaccord, Tony Dwyer, 2,800, EPS $140.00, P/E 20.0x
  • Credit Suisse, Jonathan Golub, 2,875, EPS $139.00, P/E 20.7x
  • Deutsche Bank, Binky Chadha, 2,850, EPS $140.00, P/E 20.4x
  • Goldman Sachs, David Kostin, 2,850, EPS $150.00, P/E 19x
  • Citigroup, Tobias Levkovich, 2,675, EPS $141.00, P/E 19.0x
  • HSBC, Ben Laidler, 2,650, EPS $142.00, P/E 18.7x

... there have been a small handful of analysts, SocGen and BofA's Michael Hartnett most notably, who have dared to suggest that contrary to conventional wisdom, next year will be a recessionary, bear market rollercoaster.

And then, there are those in between who expect a good 2018, but then all bets are off in 2019. Among them is JPM's chief economist Michael Feroli who has published a special report, aptly titled "US outlook 2018: Eat, drink, and be merry, for in 2019..."

Here are the seven main reasons why JPM believes that the party will continue until December 31, 2018, or thereabouts:

  • Growth momentum at the end of 2017 is solid and global headwinds are unusually mild
  • Solid growth should put more pressure on resource utilization for an economy operating at capacity
  • Wage growth has already firmed, and unemployment rate is expected to fall below 4%
  • Core inflation should approach 2% target rate following surprising weakness early in 2017
  • Even with tightening labor markets, subdued inflation expectations should limit upside prices pressures
  • The Fed is on track to deliver three hikes this year and we believe will step up the pace to four hikes in 2018
  • The year-end period usually contains one wild card; this year it is tax reform

At that point, however, it ends.

Here are the key excerpts from the report:

The prospects for the economy at the end of 2017 look about as favorable as they have at any point in this expansion. The animal spirits of both consumers and businesses appear energized; theever-present global headwinds of the last half decade have turned to a tailwind; and the domestic fiscal austerity that has acted as a drag on growth since 2011 may now be turning to profligacy. All these factors augur above-trend growth in 2018. The only sticking point is that by many measures the economy already appears to be operating at capacity. This is the fundamental tension in the outlook: does continued above-trend growth tighten labor and product markets enough to threaten higher wage and price inflation or does growth slow enough to limit strains on the rate of resource utilization? Our outlook balances these outcomes. We see growth close to 2% in 2018; while that is somewhat below what we expect will be realized for 2017, it is still about 0.5%-point above our estimate of sustainable, trend growth. This should be enough to push the unemployment rate down into the high 3’s (Figure 1).

Inflation has been mysteriously absent this year, but historically it has not been long before unemployment below 4% began to generate firmer wage and price pressures. We expect that to be the case next year as well. Fortunately for the outlook, this will take place from a starting point in which cost pressures are relatively low, so some firming in inflation trends is not to be feared. Even with core PCE moving only slowly back toward the Fed’s 2% goal (Figure 2), we expect the FOMC will maintain a fairly steady cadence of rate hikes next year. At the beginning of 2017 the Committee’s interest rate forecast “dots” foresaw three hikes this year, and it appears that they will match that forecast. For 2018 the latest dots are looking for another three hikes; this, again, looks like a reasonable forecast to us, though we think the ongoing surprising decline in the unemployment rate means that four hikes next year now look more likely than three.

JPM then focuses on the key drivers of growth in 2018. Below we recap some of the key points"

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