It’s early in the season, but with about 50 companies having reported fourth quarter results, S&P 500 Index earnings are tracking a 12% year-over-year increase [Figure 1]. A solid 79% of the companies have bested earnings estimates, while 87% have topped revenue targets, both well above recent and long-term averages. In this week’s commentary, we preview fourth quarter earnings season and reiterate our optimism for corporate profits in 2018.

Six Reasons for Optimism

The S&P 500 has exceeded quarterly earnings expectations for 34 straight quarters and we see no reason why the fourth quarter of

Even though U.S. yields remain low by historical standards, they are attractive versus their high-quality developed market peers. However, this doesn’t mean that U.S. investors should ignore opportunities in foreign bond markets. Similar to our forecast for U.S. bonds, we expect that rising interest rates and fading central bank stimulus are likely to put pressure on foreign developed bonds in 2018.* Emerging market debt (EMD), which generally pays higher rates of interest, and in many cases are issued by countries with higher rates of gross domestic product growth and lower debt levels than many developed nations, may have a brighter r

Global economic growth exceeded expectations in 2017, and we expect another strong year in 2018. The Citi Global Economic Surprise Index, which was well above zero for most of the second half of 2017, signaled that global economic data was exceeding expectations [Figure 1]. Drivers of strong global performance in 2017 included steady growth in the United States, better-than-expected economic data in Europe, continued positive performance from Japan, and stabilization in China following several years of deceleration.

We expect the global economy to expand at a rate of 3.7% in 2018, measured by gross domestic product (GDP). Monetar

We favor U.S. and emerging market (EM) equities for tactical global allocations. After reviewing our thoughts on the U.S. equity markets in last week’s Weekly Market Commentary, we thought we’d expand our 2018 equity outlook with a focus on global markets. From a regional perspective, we favor the U.S. and EM over developed foreign markets broadly, although the improving outlook in Japan is noteworthy.

International Equities Performance Review

The year 2017 was excellent for international equities, especially for EM. The MSCI EAFE and EM indexes returned 25.6% and 37.8%, respectively, both ahead of the S&P 500