Welcome to Thoughts on the Market.

I'm Andrew Sheets, Chief Cross Asset Strategy

for Morgan Stanley.

Along with my colleagues bring you a variety of perspectives, I'll be talking about

trends across the global investment landscape and how we put those

different ideas together. It's Friday, December 6th at 2 p.m. in London.

I've spent much of my time over the last several weeks talking to investors about what we expect for the year ahead and on this program you've heard myself Mike Wilson, Mike Zesus and others talk about those expectations.

In my conversations, however, there's a lot of focus on what a realistically better or worse scenario could look like, and that's why I'd like to focus on today.

In no particular order, I'm going to talk today about what could make 2020 worse than we expect, and what can make it surprised the better.

A worse than expected 20 20 would start with a worse than expected outcome for US and China

trade. Our base case forecasts assume that the two sides agree on a phase one deal that

stops a further increase in tariffs but the bare case would be that such a deal

remains elusive and that tariffs continue to escalate while positive signs from

both sides are a reason we do not think such an escalation should be our base case, the situation remains extremely fluid.

A further escalation in trade tensions would be a risk for the global economy, but we also think it could bring new risks to U.S. growth.

S&P 500 earnings have now failed to grow for three straight quarters, and trends in small and mid-cap

companies have been even worse. Our base case is that earnings growth remains elusive for another four

quarters next year and would be worse if trade tensions escalated.

Why does that matter? In a scenario where earnings for US companies failed to grow

for two full years, we think the pressure to cut costs would mount.

One of those potential cost-cutting measures would be the layoff workers, undermining the

strong consumer story and raising the odds for a mild recession.

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