Portfolio Discussions: Equities
The S&P 500 has recovered from its 2009 lows and generated historic returns for investors along the way. This has left some investors worried that they have missed the boat. However, the economy is growing, valuations are only slightly above average and monetary policy remains accommodative. Taken together, this represents a positive picture for equities, but investors should expect more moderate returns going forward.
The economy is poised for continued growth
- Despite some continued headwinds to growth, the U.S. economy is expected to expand at a moderate pace in 2017. A weak first half did not affect equity markets, and a rebound in the second half of 2017 should provide support for stocks.
- Moderate growth should allow earnings growth to remain positive, as companies benefit from increasing consumer and investment spending.
- Though profit margins may tighten on the back of rising wages, they remain quite high among U.S. firms and are unlikely to collapse.
Earnings remain on sound footing
- S&P 500 firms posted strong earnings growth coming out of the crisis due to cost trimming and deleveraging. However, a stronger U.S. dollar and lower oil prices created some headwinds in 2015 and early 2016.
- However, it appears the clouds over earnings are beginning to clear, as energy prices are no longer in freefall and the Dollar is more contained. Furthermore any changes to tax policy could lead earnings to surprise the upside.
Stocks still offer considerable value
- Stocks are no longer cheap, but they are not overly expensive either.
- Modest revenue growth, supported by a growing economy, should provide a tailwind for stocks as long as it translates into earnings growth.
- Earnings yields on equities remain higher than yields on investment-grade bonds, suggesting that stocks remain cheaper by comparison.
- The U.S. economy looks set to continue expanding.
- Though equities have rallied considerably, they have done so on the back of impressive earnings growth.
- With equity valuations above long-term averages, earnings growth will be key in driving returns going forward.
Focusing on different asset classes or regions, Portfolio Discussions help to frame investment conversations using slides from the Guide to the Markets.
Diversification does not guarantee investment returns and does not eliminate the risk of loss. Diversification among investment options and asset classes may help to reduce overall volatility.