So far, equity performance patterns in 2018 are looking similar to those in 2017. As we anticipated, emerging market (EM) and European stocks are outperforming the global benchmark and U.S. equities. Within the U.S., the growth style of investing is still beating its value counterpart and the dollar is flat to down. However, U.S. large and small market-capitalization stocks have reversed this year versus last year, meaning that small caps are now outperforming.

Despite any near-term optimism about the tax cuts, we expect recent U.S. small-cap outperformance to wane, given tightening monetary policy, rising short-term interest rates, a flattening yield curve, heightened volatility, higher exposure to below-average economic growth, a weaker dollar, slower earnings growth and anemic investor flows.

In our view, international equities—including EM and Europe—should continue to outperform for the following reasons:

1) valuations are more attractive than U.S. equities;

2) many international markets and economies are in earlier, better stages of their cycles;

3) faster economic, sales and earnings growth can be found outside the United States;

4) non-U.S. developed and EM currencies have appreciated versus the U.S. dollar;

5) inflation is easing across the developing world and in select developed economies; and

6) monetary policy is generally accommodative.

For more details, read the complete Equity Strategy Playbook and check back in six months for our updated global equity views.

The Equity Strategy Playbook leverages our resources as a leading global asset manager, including decades of research experience, to gather and present the indicators that matter most for equity performance in a visual and digestible formatall in one place. Our multi-factor framework for equity portfolio positioning is a consistent, systematic method that’s well-suited for thematic, big-picture investing. Investors can use this straightforward, transparent framework to see how we arrived at our conclusions, and to form their own.