The International Monetary Fund (IMF) has pared down its outlook on U.S. economic growth, thanks to growing uncertainties around the nation’s fiscal policies. Should that pose headwinds for equities? Not so fast, we say.
From 2.3% in its April update, the IMF’s U.S. GDP growth forecast for 2017 has dipped to 2.1%. The Fund has trimmed down on next year’s growth as well – to 2.1% from its April projection of 2.5%. Dragging down the Fund’s projections are growing uncertainties around Donald Trump’s proposed policies. Trump’s promises to supercharge the economy had led the IMF to shoot up its growth projections in January, under hopes that the proposed tax cuts, infrastructure spending, and other pro-growth reforms would gain steam over the year. But now, fuzzy implementation paths of the proposals have made the Fund remove the policies from its forecast.
On the other hand, Trump’s administration has predicted that the annual real GDP growth will reach 3% by 2021, and maintain the same rate each year through the remaining forecast horizon till 2027 (as mentioned in the budget proposal for Fiscal 2018). The IMF, however, has hinted at its apprehensions about the assumption. According to the IMF, the White House’s projection of the U.S. growth path is “unlikely” to materialize, since the implied level of acceleration has been rare in advanced economies since the 1980s, and has occurred only amid strong global demand and during recoveries from major recessions. It also mentions slowing productivity gains and an aging population as potential headwinds to the nation’s growth landscape.
What Does IMF’s Forecast Revision Mean for US Stock Markets?
But is this reduced optimism sufficient to affect the market rally? Sure, macroeconomic conditions could potentially have some role in influencing investment decisions, but there is another factor – probably the most crucial one in guiding financial securities’ long-term prospects – corporate fundamentals – which have scored solidly well in recent times. The S&P 500’s year-over-year earnings growth for Q4 2016 and Q1 2017 were at record-highs of +7.4% and 13.3% respectively (as reported in Zacks Earnings Trends). The outlook for upcoming quarters looks optimistic as well.
From the rally in U.S. equities, it is evident that fundamentals are holding their own even in the face of rising policy uncertainties. Corporate fundamentals may well offset the effect of downward revisions in macroeconomic forecasts, especially if the revisions are not earth-shattering. IMF’s forecast has declined by only -0.2 percentage points (ppt.) for 2017 and by -0.4 ppt. for 2018, compared to its previous projections.
Bottom Line for Investors
Policy uncertainties have dimmed IMF analysts’ projection of U.S. growth. The Fund is also skeptical of the U.S. government’s target of a sustained 3% growth in the U.S. Whether or not the U.S. achieves the growth rate path assumed by the proposed federal budget, what remains true is that growth is growth at the end of the day. As the world’s largest economy, there may not always be room for earth-shattering growth. Still, the U.S. economy is on its third-longest expansion since 1850 (as mentioned in an IMF note), and is expected to grow positively at least over the next few years. Its GDP growth rate in 2015 was ahead of that of several other advanced economies, such as the U.K., Germany, Japan and France. (as indicated by World Bank data).
Also, the IMF’s moderately negative adjustments to growth forecasts for the next few years should not spell bearish sentiments for U.S. markets, especially amid solid corporate earnings’ scorecards. More than policies, it is fundamentals that ultimately define a long-term potential.
At Zacks Investment Management, we stay up-to-date on macroeconomic as well as corporate fundamentals, and their potential effects on equities and other financial securities. That way, we are better able to help our clients build an effective nest egg with regular rebalancing. We leverage our in-house databases, software, models, and research, to provide completely unbiased analyses and forecasts. If you are curious to learn more about what opportunities the latest economic and financial outlook could have for your investing goals, give us a call at 1-888-600-2783. We offer customized investment strategies for every client’s individual financial needs and risk preference. We will be happy to answer your questions, discuss your financial situation and our services with you.
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