We have made several adjustments to the Global Equity strategy’s U.S. sector exposures to keep them aligned with the continued evolution of our macroeconomic outlook. Specifically, we eliminated U.S. Financials Sector exposure and added to existing U.S. Information Technology and Communication Services Sector exposures. Given signs of economic deceleration and a continued maturing of the economic cycle in the U.S., we believe it was appropriate to focus the strategy’s more economically-sensitive sector exposures in areas with both cyclical and secular tailwinds. We believe tailwinds for the Financials Sector, which were in place when we added the allocation in 2017, have subsided, and the interest rate and economic environment will be less favorable for the sector going forward. In contrast, we see ongoing tailwinds for both the Information Technology and Communication Services Sectors as the economic cycle continues to mature.
Outlook Update: We expect moderate economic growth to continue in the U.S. in the near-to-intermediate term, but our outlook contemplates a deceleration in growth as the cycle continues to mature. We have already seen signs of slowing manufacturing and construction activity in 2019. Further, our interest rate outlook has evolved, with the flattening and partial inversion of the yield curve. While we do not see this as portending near-term recession, we note that the potential for interest rate cuts by the Federal Reserve has increased, as growth decelerates and inflation pressures remain muted. These portfolio adjustments reflected our view that U.S. economic growth will remain positive, yet decelerate modestly, as well as sector-specific implications of our outlook.
Eliminated U.S. Financials: The Financials Sector is economically sensitive and, while positive economic growth continues, we expect some deceleration in growth. The current, partially-inverted shape of the yield curve is unsustainable, in our view, and some reduction in short-term rates seems the most likely path toward rate normalization, which presents a potential headwind for Financials. The potential for Fed rate cuts has increased, with slowing economic growth and limited inflationary pressures, and lower short-term rates could weigh on profitability for major financial institutions that have significant exposure to floating-rate assets. Financials firms benefited from the 2017 tax reform and a reduction in regulatory pressures, but the likely impact of these factors is limited going forward.
Increased Allocations to U.S. Information Technology and Communication Services Sectors: We see continued opportunity in Information Technology and Communication Services as the economic cycle matures. Information Technology benefits from cyclical enterprise spending on technology infrastructure to drive efficiencies as economic growth slows, as well as secular trends, such as the shift toward cloud computing and growth of digital payments. Communication Services benefits from spending on advertising to sustain consumer demand late in the economic cycle, as well as secular trends such as the shift toward digital advertising and online media consumption.