Portfolio Discussions: Equities
The S&P 500 has recovered from its 2009 lows and generated historic returns along the way. This has left some investors worried that they have missed the boat. However, the economy is growing, and while valuations look fair relative to history, equities still look attractive compared to fixed income. 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
- We expect that the above trend growth seen in 2017 will be maintained this year. While growth may slow in 2019, the medium-term backdrop should be supportive for stocks.
- Moderate economic growth should allow earnings growth to remain positive, as companies benefit from increasing consumer and investment spending, as well as lower tax rates.
Earnings remain on sound footing
- S&P 500 firms posted strong earnings growth coming out of the crisis due to cost trimming and deleveraging, but a stronger U.S. dollar and lower oil prices created some headwinds in 2015 and early 2016.
- However, the clouds over earnings have cleared, as energy prices are no longer in freefall and the Dollar is more contained. Furthermore, newly minted tax policy should provide an additional boost to profits this year.
- Though profit margins may tighten on the back of rising wages and rates, they remain quite high among U.S. firms and are unlikely to collapse.
Stocks still offer considerable value
- Stocks are no longer cheap, but they are not as expensive as they were last year.
- 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 cheap relative to fixed income.
- 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 around 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.