Modest Stock Market Gains To Continue For A Few More Months, But 2014 Could Mark A Reversal: Jerome Levy Forecasting Center

The U.S. economy’s moderate growth pattern is likely to persist for at least two more quarters, but profit expectations could disappoint by the second quarter of 2014 because “the economic climate could change considerably,” economic analyst David Levy, chairman of the Jerome Levy Forecasting Center, said Thursday.

He said the outlook for profits, “along with mixed overseas conditions, translates into public company earnings gains” that may meet expectations for the third quarter. But Levy, writing in the center's just-published September Levy Forecast, also predicted the gains would “probably fall short of current expectations” for the fourth quarter of 2013 and the balance of 2014.

“Nevertheless, profits and the economy might be firm enough for the stock market to rise into next year,” he said, adding that economic data is unlikely to provoke much fear that inflation is coming back, the Fed needs to accelerate its tightening plans, and that investors are increasingly restless on the financial sidelines.

U.S. equities would likely do better than European and emerging market securities, Levy said.

The two biggest potential threats to the stock market in the next six months are from international disruptions, particularly in the emerging markets, and the U.S. housing market, where yields are starting to do what we believe will be notable damage to residential real estate sales, which will slow price gains.

Emerging market economies, despite overly optimistic consensus expectations, are particularly vulnerable. Unlike developed economies, many emerging market countries lack the capacity to run continual, large deficits, to provide whatever capital is necessary to stabilize their banking systems and to control their domestic interest rates.

Levy also said that in a period of austerity the only way the economy can sustain a strong expansion is through a potentially disastrous resurgence of "pathological speculative activity and rapid balance sheet expansion.”