When the presidential election is over, investors can focus on what is going on in the world economy and what future investment opportunities are lurking out there. If Donald Trump were to win, the outlook would be very uncertain because of his maverick ideas on both domestic and foreign policy. Though Hillary Clinton’s victory is likely, we should not assume a seamless transition from the policies of the Obama administration. She will focus on infrastructure, improving the Affordable Care Act, job creation, revising the tax code and immigration. The question will be how much of her agenda will she be able to get passed by a Republican-held House of Representatives.

Probably the most important lesson of the last six months is the importance of populism in the political process. A large segment of the population in the United States and Europe believes that their future economic opportunities are limited, and they want change from the path being followed by their governments. This discontent fueled the political success of Bernie Sanders and Donald Trump. Populism and immigration reform were the key factors abroad, influencing U.K. voters to leave the European Union.

Most observers would agree we are in a period of secular economic stagnation, but the equity market in the United States is near an all-time high and initial unemployment claims are at a 43-year low. If Hillary Clinton wins the presidency, it may not be because a plurality of American voters embraced her policies, but because many were adverse to the prospect of a Donald Trump–led White House. A majority of voters actually distrust her, and she might have lost to John Kasich, Marco Rubio or even Jeb Bush had they been nominated.
While we all support the concept of improving infrastructure, the Obama administration actually got very little done, despite being committed from the beginning to “shovel ready” projects. To get infrastructure work implemented effectively and quickly is hard. Although Larry Summers believes infrastructure should account for 1% of GDP, we can’t count on fiscal spending to contribute in a major way to overall economic growth in the United States anytime soon, even if these programs get through Congress. There is also the question of how many new jobs would be created by increased government spending. Given the doubts that exist about the benefits of revising the tax code and modernizing immigration policy, these challenges reinforce the futility of looking to the new administration to get the economy on a much stronger growth path right away.

We do know we are facing some headwinds. The Federal Reserve and other central banks are beginning to doubt the effectiveness of continued monetary expansion as a way to stimulate the economy, despite increased liquidity having been an important factor in driving the equity market higher since the end of the recession in 2009. We are also seeing the early signs of inflation. Both the Consumer Price Index and the Personal Consumption Expenditures indicators are still below 2%, but average hourly earnings are up 2.6%, the availability of skilled workers is getting tighter and inflation could become a negative factor some time during the next year. Rising rates and more inflation are likely to be interpreted negatively by equity investors.

The question puzzling investors is whether equities can continue to move higher when the economy is struggling. Real GNP has been growing at less than 2% and both short and long term interest rates are likely to rise, dampening price earnings ratios. The price of oil is moving higher, taking some money out of the pockets of consumers. Data on housing have generally been favorable to growth, but recent reports on starts were disappointing. The oil drilling rig count has increased (as the price of oil has come off its lows), and there is the prospect of improved capital spending from the energy sector, but it hasn’t appeared yet.

Fracking has picked up but it is not as vigorous as it was when oil was above $70 a barrel.

There are, however, countervailing winds. Commodity prices are rising, which should be good for emerging markets. The producer price index is rising in China, which usually coincides with improved growth there. No “hard landing” talk any more. Earnings for the Standard & Poor’s 500 have been essentially flat since 2014, but analysts believe they will be up sharply next year. That echoes their optimism in previous years.

While I believe we are in a period of secular stagnation where valuations are high and profits are likely to be disappointing, I do think there is a bull case out there: Hillary Clinton is elected president by a wide margin and at the top of her agenda is infrastructure spending. She persuades Paul Ryan to rally Republicans in Congress to pass an ambitious program to upgrade our roads, bridges, airports and tunnels. Her argument is that a bipartisan effort will benefit both political parties. Jobs are created as the projects get underway.

Consumer spending improves because the infrastructure workers now have the resources to buy what they had postponed. The price of gasoline edges up and inflation moves above 2% but this gives companies some pricing power which had been lacking. The Federal Reserve begins to raise rates, putting more money in the hands of retirees. Energy companies are heartened by the improvement in the economy and the rise in oil prices and they begin to spend money on capital projects, creating more jobs. The minimum wage begins to rise across the country. With real growth above 2%, corporate profits begin to rise, justifying higher stock prices. Investors become enthusiastic about opportunities in equities. Entrepreneurship flourishes and the initial public offering market becomes strong again.

You could also argue that historical multiples that indicate the market is expensive don’t apply because interest rates were much higher in earlier cycles. At these yields, equities should sell at somewhere between 25 and 30 times earnings. The public has been selling equity mutual funds and buying bond funds for several years. Hedge funds also have a low equity exposure compared to historical levels. Even long only investors are cautious. This kind of negative market mood generally creates opportunity. Another positive is the fact that no recession seems to be in sight even though the present expansion is 88 months old. Excesses like an inverted yield curve, investor euphoria, a hostile Federal Reserve and bloated inventories do not appear to be present. Even so, some prominent economists think there is a 70% chance of a recession in 2017. I would estimate the probability of the bull market continuing into 2017 at something like 35%.

My principal worry is earnings disappointment. According to Bianco Research, revenues in 2017 for the S&P 500 are only expected to increase 2%. Energy is a key part of the revenue problem, but even if you leave the energy sector out of the tally, the increase in revenues is only 3%. Up until the end of 2015 revenues were increasing at a 6% (5% without energy) rate and they have been on a downward slope ever since then. Earnings show a similar pattern. For 2017 earnings for the S&P 500 are expected to increase 1%.
Without energy the increase is 3%. Until the middle of 2015, earnings were showing an annual increase of 12% and they have been trending downward ever since. There are many more optimistic forecasts for earnings out there, some estimating earnings at $120 to $125 for 2016 and $125 to $130 for 2017. I am skeptical because modest revenue growth and rising wages will compress margins. We’ll know more when the third quarter results are in. While Microsoft (ticker: MSFT) and other technology stocks, along with General Motors  , United Technologies (UTX) and some financial stocks, have favorably surprised, General Electric (GE) and Honeywell International (HON) have disappointed. So far however, the general tone of earnings is positive but not resoundingly so.
The other key challenge to the bull market is monetary policy. I have long argued that the accommodative policies of the Federal Reserve have played a major role in the increase in equity prices since 2009. We know that the next Fed move is likely to be toward higher rates and we are likely to see a 25 basis point increase in December. If earnings were generally disappointing and monetary policy were more restrictive, I am hard pressed to see equities moving much higher. Marty Zweig, who has passed away, was famous for his warning, “Don’t fight the Fed.”
Perhaps the positive market performance is related to events taking place abroad. China is reporting better economic performance. Nominal growth has increased from 7.8% to 8.6%, encouraging investors. China is a major contributor to overall world growth and stronger numbers from there form a positive backdrop for the global outlook. According to my former Morgan Stanley colleague Steve Roach (now at Yale), China is contributing 1.2 percentage points to world growth which is only expected to be 3% at most. Almost every aspect of the Chinese economy is showing double-digit year over year increases, according to Evercore ISI. Vehicle sales are up 27%, house prices up 17%, government spending up 14%, bank loans up 13% and retail sales up 11%.

Other positive factors that may be influencing investors are the continuing increase in average hourly earnings which the Atlanta Federal Reserve Bank projects at 3% next year. In addition, the increase in oil prices should push inflation somewhat higher, and with inflation having been so low for so long, this could be a positive for earnings. The price of existing homes has been rising and this should encourage prospective buyers to make a commitment before the house they want gets to a price they cannot afford. The enormous AT&T / Time Warner deal shows that “animal spirits” are still around. While there is excitement about this example of vertical integration, there are many regulatory hurdles that have to be surmounted. I continue to be suspicious of the synergies that come from merger and acquisition activity. While earnings per share increases may occur as a result of cutting duplicate sales and administrative people, the growth prospects of the combined companies are not necessarily improved.

The Saudi Arabian $17.5 billion bond issue was also viewed as a positive because it showed an appetite for large fixed income offerings. The negative aspect is that the country needs the money to meet its internal obligations with oil prices at relatively depressed levels. U.S. rail car loadings have moved up sharply from a recent low, as has industrial production. While these industrial data points are impressive, they represent an improvement from a depressed condition and must continue in order to indicate the economy is on solid footing.

The consumer is the most important factor in the economy and if wages increase 2.6% and employment is up 1.7%, the nominal income proxy would increase 4.3%. Using the more optimistic Atlanta Fed numbers, you get to a 5.3% nominal increase. We’re only at 2.5% now so that’s a big change. The Goldman Sachs Commodity index is up sharply. Junk bond yields are down. Both of these indicate optimism about the economy. The Economic Cycle Research Institute, which has an excellent past record, forecasts a sharp rise in economic growth, but operating rates are 75% of capacity so there is plenty of slack that needs to be filled.

With so much good news, why am I cautious? I still worry that valuations are high and earnings will be disappointing in spite of the recent positives. I also am concerned that a strong dollar, partly resulting from the Fed tightening in December might be a negative. Many investment managers have had lackluster performance this year and they want the market to go up before 2017 begins to give their clients confidence, but over the years I have found that the market rarely provides what most of its participants desire. In this environment, knowing where to put your money is difficult. In equities, I still like several of the dominant Internet companies that will have open-ended earnings for some time, depressed biotechnology with strong pipelines and the emerging markets that are undervalued relative to the developed world.

Wien is vice chairman of Blackstone Advisory Partners, a subsidiary of the Blackstone Group.