A change in Federal Reserve policy or the tapering of quantitative easing remains the greatest risk to equity markets, according to Northern Trust's quarterly investment manager survey.
However, managers surveyed largely believe any QE tapering or an impasse over the federal shutdown and debt ceiling debate will not have a strong impact on U.S. economic growth. More than 60% of managers believe the U.S. economy will keep growing if 10-year Treasury rates increase by 50 basis points; 42% said rates could rise by 100 basis points without stifling growth.
Nearly all managers thought the budget and debt ceiling debates will not have a strong effect on equity markets — 53% expect a modest decline of less than 10% for the S&P 500, and 40% expect little to no effect.
Only 8% of managers expect U.S. GDP growth to slow down, while 55% said it will accelerate, up from 45% the previous quarter. Thirty-seven percent said growth will remain the same.
Expectations on other economic growth factors remained strong in the third quarter with little change from the previous quarter's survey:
- 86% said job growth will remain stable or accelerate over the next six months;
- 71% expect housing prices to rise in the next six months; and
- 89% expect corporate profits to remain stable or increase in the fourth quarter.
In terms of regional equity markets, 39% of managers said the U.S. market is fairly valued; 33% said it is undervalued. Sixty-four percent said emerging markets equities are undervalued, up from 49%, but only 23% expect emerging markets to outperform developed markets over the next six months. European equities are considered undervalued by 53% of managers, down from 59% last quarter.
Managers continue to be most bullish on U.S. large-cap and small-cap equity, and emerging markets equity.
About 100 institutional money managers were surveyed in mid-September.