Iran just a headline risk ... for now
In the wake of the killing of Iranian Maj. Gen. Qassem Soleimani, stocks have pulled modestly off record highs, oil prices have jumped and haven trades such as gold and Treasury bonds have rallied. But while the potential for escalation bears watching, developments in the tinderbox that is the Mideast arguably represent a headline risk, not a fundamental risk to the global economy or markets. Bull markets end with recession, and there’s scant evidence of one occurring anytime soon.
In fact, our view is that global central bank accommodation throughout 2019, continued benign inflation in 2020 and easing trade tensions (a Chinese trade delegation plans to travel to Washington next Thursday for a signing of the Phase One "skinny" deal) will spur a reacceleration of global growth this year. This, in turn, should allow S&P 500 earnings to recover in the second half and valuations to continue to expand further. Historically, P/E multiples expand nearly a point a year on average during non-recessionary years, suggesting a market P/E of 19.5 this year if it follows the norm.
This would support our year-end target of 3,500 on the S&P even with modest earnings growth. Within equities, we favor parts of the market that are both levered to a reacceleration in growth and offer relative value, such as industrials, financials, energy and materials, U.S. small caps and emerging-market equities.