As we close out the calendar on 2017, investors have been rewarded for taking market risk, and even risk control assets have had positive performance. That said, there seems to be a growing chorus of skepticism, with many concerned that we may be headed for a market correction, or even worse. This continues to be the bull market that doesn't get the respect we think it deserves.
Investors have a long list of reasons to be optimistic into 2018. The US, Europe, and Japan all show improving economic indicators, and the emerging markets have been surprising on the upside. This supports one of the key drivers of risk appetite-- the synchronous global growth story.
At the same time, inflation continues to trend at a below average pace. Global low inflation has enabled central banks around the world to remain accommodative. And even in the US, the Federal Reserve has been on a slow path toward normalization. Maybe even more importantly, global earnings are trending above estimate, with double-digit growth in 2017, and likely high single-digit growth in 2018.
Clearly, markets have taken notice of these positive trends, and prices reflect a lot of this good news. That said, both institutional and retail investors seem to be waiting with bated breath for a shoe to drop. They're reluctant to embrace fully the bullish backdrop. Most cite high equity valuations as a key area of concern, despite the evidence that suggests a spurious connection between valuations and short-term returns.
It is possible that good news could become bad news for markets if investors have to readjust their collective perspective on the pace and magnitude of monetary policy tightening. Too much of a good thing may prompt policy officials to move faster than the markets priced. Also, global political risk shows no signs of abating. While neither of these scenarios is in our base case, they both warrant constant consideration and monitoring.
Investors can always find reasons to be skeptical of risk asset markets. We saw this a year ago, as many professed the same concerns heard today. Those skeptics missed out on some remarkable global equity performance. As we head towards 2018, we're optimistic about equities. We believe that strength across macro and micro factors, amplified by continued global central bank accommodation, will reward investors for taking risks next year.