What has been the biggest disruptor in US equities over the past 12 months and its impact? 

Jonathan Golub: TECH+ (the broadly-defined universe of tech-related companies) makes up roughly 30% of the S&P 500’s market cap. Revenue growth and operating margins (EBIT) for these stocks are roughly double that of the rest of the market. The result is a broad market that is effectively two distinct baskets—TECH+ and the rest. Similar to the late-90s, the success of the market rests in the hands of a small number of tech-related companies. Different than the late-90s, returns for TECH+ are driven almost entirely by fundamental success, rather than speculative valuations. Given the concentration of TECH+ domiciled in the US, the success of these names will continue to separate the S&P 500 from other equity markets over the next several years. While we are constructive on these stocks, the success of the group will be more disparate, with many of these names blessed with large and untapped addressable markets, while others—handsets, for example—face slowing growth and increased government scrutiny.

What disruptive trends are investors not paying enough attention to and why?

JG: Demographics/Growth. According to the Congressional Budget Office, long-term potential GDP growth for the US economy is just below 2%—with 140 basis points coming from potential productivity enhancements and 50 basis points from labor force growth. While accurately predicting productivity is quite challenging, demographics are far simpler. With birth rates down, and the population aging, the return to 3%+ GDP—on a sustained basis—is extremely unlikely. In 2018, US GDP grew 2.9%; however, the above-trend portion of this output was largely the result of government largesse in the form of tax changes and increased spending. Not surprisingly, economists (consensus) expect growth to renormalize toward trend levels (1.9%). While many investors choose to ignore demographics, focusing on shorter-term indicators, it is one of the few things we can truly count on.

Politics or monetary policy: What will be more disruptive to US equities in 2019 and why?

JG: Fed vs. Politics. While the next Presidential election might be one-and-a-half years away, Washington politics will likely remain in focus, including the results of the Mueller investigation. That said, we believe that the Fed poses a greater potential risk in the year ahead. While the futures market indicates that the Fed has likely finished raising rates, the Fed’s dot plots indicate that there is more to go—even if they pause for the time being. The market’s response to dovish/hawkish prognostications from Fed officials in the fourth quarter highlights just how sensitive the market is to central bank actions. Uncertainty around both rates and central bank balance sheets makes an evaluation of central bank policy far more challenging.