Although the US stock market has rebounded in the past few months as the news from China has improved and the dollar has weakened, we doubt it will power ahead for three key reasons. First, we expect profits in the US to be squeezed as the labour market continues to tighten. Second, we think that the China-related recovery in commodity prices, which has gone hand-in-hand with that in equity prices, is likely to pause for breath. And third, we anticipate that the Fed will tighten policy by more than investors envisage, pushing the US currency back up again. Indeed, renewed dollar strength is a key reason why we expect the underperformance of stock markets elsewhere – in Japan in particular – to come to an end.
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