Interview, Fireside Chat
Outlook for Equity Markets
- A 10% probability of recession is expected for the current year, while the U.S. economy is projected to grow at 6.5% with 87% historical odds of positive one-year returns during expansion; if bond yields rise above 3% or 3.5%, stocks may struggle as growth is exceeded, though the equity risk premium is deemed capable of absorbing further yield increases.
- S&P 500 earnings are anticipated to continue rising due to economic reopening and vaccinations, with historical data showing 7% annual growth five years after an earnings high and 10% growth during expansions; consensus estimates for sectors like financials, energy, and industrials may be surpassed by company earnings driven by operating leverage.
- Proposed corporate tax increases under the Biden administration could reduce next year's consensus earnings by approximately $13 (from $203 to $189), yet earnings would still achieve mid-single-digit growth from the current year's expected $180 level; any tax hikes are likely to be phased in and potentially diluted.
- Stock valuations are currently in the 10th decile (cheaper 90% of the time) and are supported by the low and stable inflation environment seen since 1996, which historically supports valuations 35% higher than unconditional post-WWII periods.
- The outlook favors value stocks over growth stocks due to plentiful economic growth and rising interest rates, with cyclical sectors such as energy and financials expected to benefit directly from rate increases, inflation hedging, and the economic reopening.
- Investment recommendations advise staying fully invested in equities to capture a multi-year expansion with expected S&P 500 gains of around 200% from trough to peak and ample scope for further advances beyond the recent 80% rally; new cash should be deployed via equal installments over three, six, or nine months to average in rather than waiting for a pullback.
- Market volatility is anticipated but is not expected to overturn the strategy of remaining invested, as waiting for pullbacks historically often results in higher entry prices following further rallies.