Stocks Could Be Passing through an Economic Slowdown in 2019 Goldman Sachs analysts believe some headwinds are on their way, indicating an economic slowdown.
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In stock trading and investing, you sometimes have good news and sometimes bad news. Sometimes it’s just warnings you get from analysts. Warnings regarding a potential slowdown in the economy, or the stock market heading towards a bearish situation aren’t good to hear, but they help in keeping you prepared for some adverse situation. If the adverse situation doesn’t happen, it’s fine. But if it does, you won’t be caught unawares. Headwinds Pointed out by Goldman Sachs According to Goldman Sachs analysts, there are various headwinds that could affect stocks in 2019. Among these, Investopedia analyst Mark Kolakowski turns his attention to 6 warnings or red flags that could hold back stock prices next year.
The slowing US economy - Real GDP growth for the US is expected to slow from 2.9% to 1.6% between 2018 and 2020.
China’s slowing economic growth - Real GDP growth for China is predicted to slow from 6.6% to 6.1% between 2018 and 2020.
Significant downshift in growth of US corporate earnings - A slowdown in the earnings growth of the S&P 500 from 23% to 8% between 2018 and 2019.
Soaring inflation - Core inflation is predicted to rise from 1.9%to 2.2% between 2018 and 2019-2020.
Increasing rates of interest - The 10-year US Treasury Note yield would hit 3.5% in 2019 second half.
Rising wage cost - With the US unemployment rate predicted to drop to 3.2% next year, there would be more wage pressures.
Reasons behind the Gloomy Predictions All these appear to be looking at the future with a gloomy perspective, but Goldman Sachs does seem to have solid reasoning behind these red flags. US corporate earnings are currently high as a result of tax rate reductions and other corporate reforms, but the massive year-over-year profit growth rates registered in 2018 are not likely to be repeated by most of the companies, Goldman reckons. As per the firm’s calculation, on the basis of consensus estimates for each of the individual companies making up the S&P 500, there could be a massive drop in the earnings growth for the whole index from 23% to just 8% between 2018 and 2019.
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There could be declines in annual growth rate for earnings by over 15 percentage points in various sectors, predicts Goldman Sachs. The energy sector is predicted to have the biggest drop, from the 102% growth rate it enjoys to just 25%. The information technology sector is predicted to dip from 23% to 5% while the materials sector could sink from 32% to just 4%. Communication services would also have a dramatic drop from 21% to 3% while financials would drop from 29% to 10%. According to DataTrek Research’s Nicholas Colas, equity markets have already made easy money. It’s not going to be that easy in 2019. China Concerns Moving over to China, its economic health is a major influencing factor since it ranks second in the category of the largest economies in the world, only behind the United States. China is a significant consumer of products made by US companies. According to Goldman’s projections, the inflation-adjusted, real GDP growth rate would decline to 6.2% in 2019 from 6.6% in 2017 and 6.9% in 2016. In 2020, the GDP growth rate would slide further to 6.1%. Though this is a decline, the growth rates as such are relatively strong. Trade tensions have always been a concern, especially with China retaliating to US tariffs. If a trade war escalates, there would be a massive growth reduction. According to what Bank of America Merrill Lynch warned back in June, disruptions in the supply chain and a confidence decline could make way for an outright recession. Increasing Pressure on Profit Margins An increase in wages, interest rates and general inflation can reduce profit margins for companies. That’s why Goldman considers these factors as worrying. The new US tariffs imposed on imported goods also raise input costs for companies and manufacturers, which further pressurize the margins. Another effect of the rising rates of interest is that bonds become more attractive than stocks. Equity valuations can get depressed. Goldman’s predictions aren’t pointing to a crash or recession though. Instead, they only point to economy slowdowns. Kolakowski points out that there are differences in opinion among analysts as to how much of a slowdown or a risk of recession there is. It is good to be prepared though. That’s the bottom-line.
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