US-China standoff catches US economy at low ebb  

Maxine Elliott    Philip Lawlor, managing director, head of global markets research
22 May 2019
Categories: General Market Analysis, Fixed Income, Financial Policy, Regulatory changes, Equity Investments

Country or region: China

The pickup in headline first-quarter US GDP growth sent out false signals about the underlying health of the US economy, says Philip Lawlor, head of global markets research at FTSE Russell.

Reference URL:


The pickup in headline first-quarter US GDP growth sent out false signals about the underlying health of the US economy, as a closer analysis reveals. And the recent flare-up in US-China trade tensions isn’t helping.

As we highlight in our latest overview of the global equity markets, even the pacesetting US economy has been losing momentum for the past several quarters. The US Q1 GDP benefited from mostly transitory gains in net exports and inventories. Personal consumption growth and final sales to domestic purchasers (a measure of household and business spending that excludes exports and inventories) have slowed sequentially since Q2 2018, as has nominal GDP (see chart below).  A protracted US-China trade war and new tariffs, if sustained, would impose additional strains on US consumers and businesses.

Trade conflict reignites global growth fears

Market sentiment remains fragile. With the recent escalation in the US-China trade war, overnight indexed swap markets are pricing in greater odds of at least one Federal Reserve rate cut this year. In past cycles, Fed rate cuts have coincided with signs of weakening US wage growth, a lagging indicator. It would appear, then, that the market believes that US pay gains have already peaked. This also suggests if wage growth continues to accelerate it might prevent the Federal Reserve from delivering the rate cuts the markets expect. 

The upswing in safe-haven currencies since March, the recent inversion of the US Treasury yield curve (with three-month bill yields rising above 10-year bond yields for the first time this policy cycle) and the sharp falloff in safe-haven sovereign bond yields (see chart below) lend further credence to rate-cut expectations.


The good news − US EPS forecasts improve

The stronger-than-expected Q1 GDP and earnings results have driven a decisively positive turn in consensus 12-month-forward EPS forecasts for the Russell 1000® and 2000® Indexes, following several months of steady declines (see chart below). For most other developed markets, the downtrend in forward EPS estimates appears to have bottomed, with the exception of Asia Pacific, which has continued to see downgrades.

While consensus analyst forecasts have been cut significantly over the past six months, the Russell 2000 remains the earnings growth leader, with 2019 EPS now projected to advance 14% year-over-year. That compares with expected gains of 3.5% for the Russell 1000 and of 4.1% for the FTSE World ex US Index.


The good news − global selloff clips valuations

The recent retreat in global equities brought valuations mostly lower across most developed markets. At 16.9x consensus 12-month-forward EPS estimates, the FTSE US multiple remains well below its 2018 peak and three-year average.


On this basis, the FTSE US also retains a sizable 36% premium relative to its global peers. Moreover, viewed through the lens of long-term inflation-adjusted price/earnings ratios (the moving-average PE, or MAPE), the FTSE US Index represents the only market with a current reading above its 20-year average and stands at almost twice the levels of FTSE Europe ex UK and FTSE Asia ex Japan Indexes.  


It is important to assess the equity outlook within the context of this evolving macroeconomic environment. Given the lessons of past late-cycle eras, incoming data suggest continued crosswinds for risk assets.


© 2019 London Stock Exchange Group plc and its applicable group undertakings (the “LSE Group”). The LSE Group includes (1) FTSE International Limited (“FTSE”), (2) Frank Russell Company (“Russell”), (3) FTSE Global Debt Capital Markets Inc. and FTSE Global Debt Capital Markets Limited (together, “FTSE Canada”), (4) MTSNext Limited (“MTSNext”), (5) Mergent, Inc. (“Mergent”), (6) FTSE Fixed Income LLC (“FTSE FI”) and (7) The Yield Book Inc (“YB”). All rights reserved.

FTSE Russell® is a trading name of FTSE, Russell, FTSE Canada, MTSNext, Mergent, FTSE FI, YB. “FTSE®”, “Russell®”, “FTSE Russell®”, “MTS®”, “FTSE4Good®”, “ICB®”, “Mergent®”, “The Yield Book®”  and all other trademarks and service marks used herein (whether registered or unregistered) are trademarks and/or service marks owned or licensed by the applicable member of the LSE Group or their respective licensors and are owned, or used under license, by FTSE, Russell, MTSNext, FTSE Canada, Mergent,  FTSE FI, YB.  FTSE International Limited is authorized and regulated by the Financial Conduct Authority as a benchmark administrator.

All information is provided for information purposes only. All information and data contained in this publication is obtained by the LSE Group, from sources believed by it to be accurate and reliable. Because of the possibility of human and mechanical error as well as other factors, however, such information and data is provided "as is" without warranty of any kind. No member of the LSE Group nor their respective directors, officers, employees, partners or licensors make any claim, prediction, warranty or representation whatsoever, expressly or impliedly, either as to the accuracy, timeliness, completeness, merchantability of any information or of results to be obtained from the use of FTSE Russell indexes or research or the fitness or suitability of the FTSE Russell indexes or research for any particular purpose to which they might be put. Any representation of historical data accessible through FTSE Russell indexes or research is provided for information purposes only and is not a reliable indicator of future performance.

No responsibility or liability can be accepted by any member of the LSE Group nor their respective directors, officers, employees, partners or licensors for (a) any loss or damage in whole or in part caused by, resulting from, or relating to any error (negligent or otherwise) or other circumstance involved in procuring, collecting, compiling, interpreting, analyzing, editing, transcribing, transmitting, communicating or delivering any such information or data or from use of this blog or links to this blog or (b) any direct, indirect, special, consequential or incidental damages whatsoever, even if any member of the LSE Group is advised in advance of the possibility of such damages, resulting from the use of, or inability to use, such information.

No member of the LSE Group nor their respective directors, officers, employees, partners or licensors provide investment advice, and nothing contained in this blog or accessible through FTSE Russell indexes or research, including statistical data and industry reports, should be taken as constituting financial or investment advice or a financial promotion.

Past performance is no guarantee of future results. Charts and graphs are provided for illustrative purposes only. Index returns shown may not represent the results of the actual trading of investable assets. Certain returns shown may reflect back-tested performance. All performance presented prior to the index inception date is back-tested performance. Back-tested performance is not actual performance but is hypothetical. The back-test calculations are based on the same methodology that was in effect when the index was officially launched. However, back- tested data may reflect the application of the index methodology with the benefit of hindsight, and the historic calculations of an index may change from month to month based on revisions to the underlying economic data used in the calculation of the index.

This publication may contain forward-looking assessments. These are based upon a number of assumptions concerning future conditions that ultimately may prove to be inaccurate. Such forward-looking assessments are subject to risks and uncertainties and may be affected by various factors that may cause actual results to differ materially. No member of the LSE Group nor their licensors assume any duty to and do not undertake to update forward-looking assessments.

No part of this information may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without prior written permission of the applicable member of the LSE Group. Use and distribution of the LSE Group data requires a license from FTSE, Russell, FTSE Canada, MTSNext, Mergent, FTSE FI, YB, and/or their respective licensors.

Thomson Reuters/Refinitiv content is the intellectual property of Thomson Reuters. Any copying, republication or redistribution of Thomson Reuters content, including by caching, framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters. Thomson Reuters is not liable for any errors or delays in content, or for any actions taken in reliance on any content.


Date of original publication:


Total Views: 138
Total Downloads: 0

Share Article

Reader Comments

No comments made on this post yet


If you have any copyright and other associated infringements related to this item, please click on the Terms and Conditions link where you will be directed to the Digital Millennium Copyright Act (DCMA) that will outline the procedure for raising your concern.

If you have any concerns with the content of the item [e.g., offensive language and/or material, inappropriate material] then please proceed to utilize the Contact Us form. Remember that when using the Contact Us form, please ensure you reference/cite clearly the item in question (e.g., name of article, author(s) of article) and the nature of the complaint.