2019 Global Market Outlook Press Briefing U.S. EQUITIES. John D. Linehan, CFA CIO, Equity, Portfolio Manager November 13, 2018

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1 2019 Global Market Outlook Press Briefing U.S. EQUITIES John D. Linehan, CFA CIO, Equity, Portfolio Manager November 13, 2018

2 U.S. Equity Outlook: Summary ENVIRONMENT Market ascended to all-time highs before October correction Year of economic expansion; we see near-term recession risk as low Strong earnings growth and renewed confidence in the economy were drivers for the market s rise Concerns around China tariff war and Fed tightening have been the catalysts for the most recent downturn Valuations are a neutral factor Growth outperformed value across market caps in

3 MARKET BACKDROP

4 The Equity Market Roller Coaster Ride S&P 500 TOTAL RETURN INDEX January 1, 2000 to October 31, , % 5,369 October 31, 2018 P/E (forward) = 15.5x 5,000 4,000 3,000 2,107 March 24, 2000 P/E (forward) = 27.2x +121% 2,447 October 9, 2007 P/E (forward) = 15.8x S&P 500 Index 2,000 % Gain +/- 1,000-47% 1,109 October 9, 2002 P/E (forward) = 14.9x -55% 1,095 March 9, 2009 P/E (forward) = 10.3x S&P 500 Valuation Measures 10/31/18 10/31/17 3-Yr Avg. 5-Yr Avg. 10-Yr Avg. Price to Earnings (P/E Forward) 16.8x 18.0x 16.9x 16.4x 14.5x Dividend Yield 2.1% 2.0% 2.1% 2.1% 2.2% Past performance cannot guarantee future results. The S&P 500 is made up of primarily large-capitalization companies that represent a broad spectrum of the U.S. economy and a substantial part of the U.S. stock market s total capitalization. Sources: Standard & Poors, T. Rowe Price, FactSet Research Systems Inc. All rights reserved. 3

5 S&P 500 Earnings Indexed to 100 Cumulative Real GDP Growth Current Bull Market Is Long S&P 500 INDEX AGGREGATE EARNINGS CYCLE COMPARISON 1 As of 2Q Mar '09 to Jun '18 U.S. GDP GROWTH IN ECONOMIC EXPANSIONS As of 3Q18 50% 45% % 350 Oct '90 to Jan '00 35% Sep '02 to Oct '07 30% 25% Current Cycle % Nov '87 to Jul '90 Aug '82 to Aug '87 15% 10% 5% Years Since Trough 0% -5% Length in Years 1 Indexed at 100 at major market bottoms. Sources: FactSet [Bureau of Economic Analysis], Haver Analytics, and T. Rowe Price. 4

6 Recession Probability Price-Earnings Multiple Bull Markets Do Not Die of Old Age but Rather From Economic Downturns or Excessive Speculation PROBABILITY OF U.S. RECESSION PREDICTED BY TREASURY SPREAD* 12 Months Ahead (moving average) January 60 October S&P 500 PRICE TO 12 MONTHS FORWARD EARNINGS October 95 September Current: 16.8x Average: 16.1x *Parameters estimated using data from January 1959 to December 2009; recession probabilities predicted using data through September Sources: Federal Reserve Bank of New York, FactSet, and T. Rowe Price. 5

7 Return Difference (Value - Growth) Annualized Return Difference (V - G) Growth and Value Have Diverged VALUE-GROWTH PERFORMANCE DISPARITY SINCE 2008 As of October 31, % 10% 10% LARGE CAP VALUE/GROWTH Ten Year Periods (Rolling Monthly) As of September 30, 2018 Value Relative Growth Ten-Year Average -2 Std Dev -1 Std Dev +1 Std Dev +2 Std Dev 12% 5% 0% 2% 0% 7% -1% -2% -1% -5% 2% -10% -10% -8% -15% -3% -20% -18% -17% YTD -8% '36 '41 '46 '51 '56 '61 '66 '71 '76 '81 '86 '91 '96 '01 '06 '11 '16 Past performance is no guarantee of future results. Sources (Left): T. Rowe Price (Right): June 1926 December 1978: Fama/French Benchmark Portfolios representing Big Value and Big Growth. The Fama/French benchmark portfolios are rebalanced quarterly using two independent sorts, on size and book to market. The size breakpoint for Big versus Small is the median NYSE market equity. The growth/value break point is the 30th and 70th NYSE percentiles of book to market ratios. January 1979 Present: Russell 1000 Value and Growth Index monthly total returns. Russell Investment Group is the source and owner of the trademarks, service marks, and copyrights related to Russell Indexes. Russell is a registered trademark of Russell Investment Group. 6

8 Price-Earnings Multiple Growth P/E Ratio Relative to Value Valuations Are Beginning to Bifurcate S&P 500 PRICE TO 12 MONTHS FORWARD EARNINGS October 1995 September VALUATION PREMIUM: GROWTH VS. VALUE Based on 1 Year Forward P/E Ratio As of September 30, Russell 1000 Growth/Value Median (Dec. '97 to Present) Russell 2000 Growth/Value Median (Dec '97. to Present) Current: 16.8x Average: 16.1x '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 Overall valuations are neutral, but disparities exist between value and growth. Source: FactSet and T. Rowe Price. 7

9 Changing Government Dynamics As of October 31, 2018 FEDERAL GOVERNMENT MAKEUP IN ELECTION YEARS President R R D D D D R R Senate R D D D D R R House R D D R R R R Net Senate Seat Change Net House Seat Change +4 R +6 D +8 D +6 R +2 D +9 R +2 D +3 R +31 D +24 D +63 R +8 D +13 R +6 D Voters removed the party in power in five of the past six U.S. federal elections. R = Republican, D = Democrat Sources: Strategas Research Partners and T. Rowe Price 8

10 The Market s Tug of War Fed tightening Potential trade war Corporate and consumer debt Government deficit Strong economic growth with historically low inflation Consumer and business confidence Earnings growth Electoral cycle Innovation Near-Term Balance Favors the Bulls Source: T. Rowe Price 9

11 Percent Cumulative Increase in Fed Target Rate Cumulative Increase in GDP (SAAR, Bil. $) Inflation and Fed Expectations Are Rising INFLATION EXPECTATIONS 10 Years Ending October Year Break-even Spreads FED FUNDS RATE VS. GDP GROWTH Dec 08 Sep Dec '08 to 18Sep '18 FOMC Projection* (L) Fed Fund Futures** (L) GDP Growth (R) 3.5% 45% 40% 3.0% 35% % 30% % 1.5% 1.0% 0.5% 25% 20% 15% 10% 5% 0% 1.0 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 0.0% -5% *Median of participants forecast in the June 13, 2018 Federal Open Market Committee Summary of Economic Projections **Break-even spreads calculated using the difference between 10-year nominal Treasury yield and 10-year Treasury Inflation Protected Securities (TIPS) yield Sources: [Federal Reserve Board, Bureau of Economic Analysis]/Haver Analytics, FactSet, and T. Rowe Price. 10

12 Indexed Performance (100 = 12/31/2015) China Trade Policy Concerns Have Come Into Focus S&P 500 COMPANIES WITH MOST CHINESE REVENUE EXPOSURE RELATIVE TO THE S&P 500 INDEX Jan '16 Oct' President Trump adjusted trade policy framework Vice President Pence gave a speech on China Jan '16 Jul '16 Jan '17 Jul '17 Jan '18 Jul '18 Performance shown consists of an equal-weighted portfolio of the top 15 companies in the S&P 500 Index as of 08/27/2018 with the highest proportion of revenue generated in China. Source: Strategas Research Partners, FactSet, and T. Rowe Price 11

13 Year-Over-Year % Change Trillions of USD Thousands of USD Debt Levels Have Increased CREDIT GROWTH BANK AND NON-BANK FINANCING March 2000 June 2018 Commercial bank loans and leases* U.S. HOUSEHOLD DEBT 1Q99 2Q18 $14 $60 13% Total credit extended to private nonfinancial sectors $12 $50 $10 8% $40 $8 3% $30 $6-2% $4 Other (L) Student Loan* (L) Credit Card (L) $20-7% $2 Auto (L) Home Equity (L) Mortgage (L) $10-12% $0 Total Household Debt per Capita (R) $0 *(Left Chart) All U.S. domestically chartered commercial banks, break adjusted and seasonally adjusted data *(Right Chart) Student Loan data categorized as Other prior to 4Q 2002 Sources: Haver Analytics [Federal Reserve Board, U.S. Treasury, FRBNY Consumer Credit Panel/Equifax] and T. Rowe Price 12

14 Percent of GDP Percent of GDP (Inverted) Percent of GDP Federal Deficit Has Grown As of December 31, 2017 GROSS FEDERAL DEBT (% OF GDP) 105 FEDERAL DEFICIT (% OF GDP) -10 FEDERAL INTEREST PAYMENTS (% OF GDP) Average '59 '67 '75 '83 '91 '99 '07 '15 '59 '67 '75 '83 '91 '99 '07 ' '59 '67 '75 '83 '91 '99 '07 '15 While deficits are high as a % of GDP, debt service at current levels is more in line. Sources: Haver Analytics [Bureau of Economic Analysis, Congressional Budget Office] 13

15 Q/Q Percentage Change, Annual Rate Unemployment Rate (%) Wage Growth (12-Month Moving Average) Economy Is Accelerating and Inflationary Pressure Remains Low REAL GROSS DOMESTIC PRODUCT GROWTH January 2012 June UNEMPLOYMENT AND WAGE GROWTH January '65 September '18 11 Unemployment Rate (L) Wage Growth (R) 10% % 4 4.2% 9 8% 3 8 7% 6% 2 7 5% 1 6 4% 0 5 3% % % Sources: Haver Analytics [Bureau of Economic Analysis, Bureau of Labor Statistics], FactSet, and T. Rowe Price 14

16 Seasonally Adjusted Year over Year Growth (%) Survey Diffusion Index (+50 = Expansion) Year-Over-Year Change Consumer Confidence Index Business and Consumer Confidence Remain High CEO CONFIDENCE VS. INVESTMENT SPENDING 1Q Q Real Private Fixed Investment CEO Economic Outlook Survey 120 CONSUMER CONFIDENCE VS. CONSUMER EXPENDITURES January 2005 September 2018 Personal Consumption Expenditures (L) 8% Consumer Confidence - Survey (R) Nov 16 U.S. Election % Nov 16 U.S. Election 120 4% % % % % 20 Sources: Haver Analytics [Bureau of Economic Analysis, Bureau of Labor Statistics, Business Roundtable], FactSet [University of Michigan Survey of Consumers], and T. Rowe Price 15

17 Percent (%) Percent (%) Corporate Earnings Have Accelerated S&P 500 INDEX EARNINGS PER SHARE GROWTH E 100 S&P 500 INDEX REVENUE GROWTH E Average: 8.0% Average: 4.9% * Institutional Brokers Estimate System (IBES) estimate. Sources: FactSet and T. Rowe Price 16

18 S&P 500 Average Annual Return S&P 500 Average 6-Month Return Returns Have Been Strong Following Mid-Term Elections January 1940 through September 2018 CALENDAR YEAR RETURNS DURING PRESIDENTIAL ELECTION CYCLE 20% 18% 16% 14% 19% SIX-MONTH RETURN FOLLOWING PRESIDENTIAL MID-TERM ELECTION 20% 18% 16% 14% 17% 12% 10% 11% 10% 9% 12% 10% 8% 8% 6% 6% 6% 4% 4% 2% 2% 0% Presidential Election Cycle Year 0% Jan Sep (Rolling Monthly) Periods Ending in April of Election Cycle Year 2 Source: T. Rowe Price 17

19 Innovation Has Been Widespread INTERNET AND CLOUD HEALTH CARE MEDIA SECURITY AND DEFENSE AUTOMATION Image classification Language processing E-commerce tagging Digital personal assistants (e.g., Amazon Echo, Siri) Product recommendations Cancer cell detection Diabetic grading Drug discoveries Wearable health data recognition Video search Captioning Programming recommendations (e.g., Netflix and Comcast) Virtual and augmented reality Face detection Video surveillance Geolocation Real-time objects and threat detection (e.g., detect explosives and match faces to criminal databases in real time) Factory automation Self-driving automobiles Drones Store automation (e.g., Amazon s grab-and-go supermarket) Investment and insurance automation Sources: Nvidia Corporation, Macquarie Research, and T. Rowe Price. 18

20 U.S. Equities: Outlook Summary We expect a choppy market for 2019 Bull market thesis is still our base assumption While we do not believe a recession is likely, risks to the current bull market are increasing. As a result we are cautiously optimistic but believe the market will be choppy and headline driven. This market tug of war should favor investment strategies that are opportunistic and focused on stock selection 19

21 Important Information This material is provided for informational purposes only and is not intended to be investment advice or a recommendation to take any particular investment action. The views contained herein are those of the authors as of November 2018 and are subject to change without notice; these views may differ from those of other T. Rowe Price associates. This information is not intended to reflect a current or past recommendation, investment advice of any kind, or a solicitation of an offer to buy or sell any securities or investment services. The opinions and commentary provided do not take into account the investment objectives or financial situation of any particular investor or class of investor. Investors will need to consider their own circumstances before making an investment decision. Information contained herein is based upon sources we consider to be reliable; we do not, however, guarantee its accuracy. Past performance cannot guarantee future results. All investments are subject to market risk, including the possible loss of principal. All charts and tables are shown for illustrative purposes only. T. Rowe Price Investment Services, Inc., Distributor T. Rowe Price. All rights reserved. T. Rowe Price, INVEST WITH CONFIDENCE, and the Bighorn Sheep design are, collectively and/or apart, trademarks of T. Rowe Price Group, Inc. 20

22 THANK YOU CZXSNUUD