In recent months, the list of investor worries has grown by the day. Will we have too little fiscal stimulus after having too much? Will taxes rise while the US debt ceiling fails to? Will oil and gas prices rise too much, or will they drop too fast once the peak is reached?

This debate left investors poised bearishly just as the third quarter earnings season began. Thus far, it is delivering another historically high positive share of firms beating their estimates (83% “higher than expected” thus far).

The immediate outlook for the world economy is strong, even with the surprising negative turn in China. As the public learns to coexist with COVID-19, services activity is broadening and strengthening in recovery. Only international tourism lags severely behind. The need to replenish inventories has left most global exporters and manufacturing firms on a strong growth path for now.

However, both stimulus and unsatisfied demand are waning. Conditions vary by country, but US consumer has seen annualized personal income drop by US$3.4trn from Q1’21 peak as emergency income supports provided to 85% of the US public were not repeated. Sales of autos, electronics and housing-related goods are falling back after a surge equal to a decade’s worth of prior spending gains.

If supply continues to grow while demand moderates, future inflation may be lower than it is at present. This is despite the long-term aims of monetary policymakers, who seek a higher underlying inflation trend. The cyclical setting points to a moderation in inflation for the coming year. Citi’s forecast for Brent crude oil at US$65 by year-end 2022 is consistent with US inflation slowing to 3% on average in 2022 after a 4.5% surge in 2021.

Past Performance is no guarantee of future results. Real results may vary.

Citi’s economic forecasts suggest neither continued boom nor bust. Furthermore, despite historically poor yields, through year-end 2022, Citi analysts expected not more than another 50bps rise in US Treasury yields after the 10bps in the year through March 2021.

Modest upward pressure in yields, diminished Fed bond purchases, slowing inflation and sustained economic growth: What does this mean for investors? The most likely course is very mild valuation pressure in equities, with dividends and price appreciation limiting total returns to the mid/high single digits for global equities in the coming year. The yield environment points to another year of negative real returns for global bond holders, but less than the loss of 2021. Citi analysts see potential vulnerabilities that have very rarely turned the world economy in the past.