Five Reasons to Be Bullish on U.S. Stocks

TL;DR

Five reasons to be optimistic about U.S. stock growth.

Transcript

I would say most of it is really earnings growth. U number one, you know, it's really five reasons to be constructive US equities. I would say number one, a very very clear V-shaped recovery in S&P 500. You know, EPS growth has been taking place since Q1 of last year. So, we were at - 7%, -3%, plus 3% looks like plus 7%. And we should get all the w... Read More

Key Insights

• Earnings growth is a primary driver of optimism in U.S. equities, with a V-shaped recovery in S&P 500 EPS since Q1 of last year, projected to reach +12% to +13%.
• Despite higher than average multiples, equities are not seen as expensive when considering historical drivers, as multiples fluctuate over cycles and should be higher later in the cycle.
• On a relative basis, equities are considered very cheap, with the current equity risk premium levels not seen since the 1950s, indicating value in the market.
• Buybacks provide a strong demand for equities, potentially contributing 10-12% to returns, even without additional inflows, and are expected to increase as growth and earnings pick up.
• Policy changes from the current administration are not factored into the bullish outlook due to uncertainty, though some proposed changes like deregulation could be positive.
• Markets remain unfazed by political turmoil, as earnings and GDP growth are strong, reinforcing confidence in the bullish outlook.
• The proposed corporate tax reform, which includes a reduction in tax rates offset by other measures, is seen as revenue neutral and not necessarily positive.
• There is potential for increased inflows into U.S. equities after two years of outflows, driven by improved growth and earnings prospects.

Questions & Answers

Q: What is the primary driver of optimism in U.S. equities?

The primary driver of optimism in U.S. equities is earnings growth, particularly the V-shaped recovery in S&P 500 earnings per share (EPS) since Q1 of last year. The EPS growth has been progressing from negative to positive percentages, with forecasts expecting it to reach +12% to +13%, signaling strong performance and recovery.

Q: How are current equity valuations perceived in terms of expense?

Current equity valuations are not perceived as particularly expensive despite higher than average multiples. When considering historical drivers, the multiples are in line with expectations for this point in the cycle, as they tend to fluctuate and are typically higher later in the cycle. This perspective suggests that equities are reasonably valued.

Q: Why are equities considered cheap on a relative basis?

Equities are considered cheap on a relative basis due to the current equity risk premium levels, which are comparable to those last seen in the 1950s. This indicates significant value in the market, as the risk premium suggests that equities offer attractive returns relative to their risk, making them a compelling investment option.

Q: What role do buybacks play in the bullish outlook?

Buybacks play a crucial role in the bullish outlook by providing a strong and steady demand for equities. They are expected to contribute 10-12% to returns even without additional inflows. As growth and earnings pick up, buybacks are likely to increase, further supporting the positive outlook for U.S. equities.

Q: How do policy changes factor into the current market outlook?

Policy changes from the current administration do not factor significantly into the current market outlook due to uncertainty about their specifics and potential impacts. While some proposed changes, like deregulation, could be positive, they are not necessary to achieve the bullish targets, as the market is already supported by strong earnings and GDP growth.

Q: Why do markets remain unfazed by political turmoil?

Markets remain unfazed by political turmoil because strong earnings and GDP growth provide a solid foundation for confidence in the bullish outlook. Despite the political uncertainty, the underlying economic indicators are positive, reinforcing the belief that the market can continue to perform well without being significantly impacted by political events.

Q: What are the potential implications of the proposed corporate tax reform?

The proposed corporate tax reform involves a reduction in tax rates, offset by measures such as eliminating interest deductibility and introducing a border tax. This is seen as a revenue-neutral change, which may not be particularly positive due to the risks involved in the transition process and the potential challenges it poses to corporations.

Q: What is the expectation for inflows into U.S. equities?

There is an expectation for increased inflows into U.S. equities after two years of outflows. This anticipated shift is driven by improved growth and earnings prospects, which make U.S. equities more attractive to investors. As growth picks up, the likelihood of inflows increases, further supporting the bullish outlook for the market.

Summary & Key Takeaways

• The bullish outlook on U.S. equities is driven by strong earnings growth, with a V-shaped recovery in S&P 500 EPS since last year and projections of continued growth. Despite higher multiples, equities are not considered expensive given historical trends and cycles.

• Equities are viewed as cheap on a relative basis, with current equity risk premium levels comparable to those of the 1950s. Buybacks are expected to significantly contribute to returns, and potential inflows are anticipated as growth and earnings improve.

• Uncertainty around policy changes means they are not factored into the current outlook, though some proposals, like deregulation, could be beneficial. Markets remain resilient despite political turmoil, supported by strong earnings and GDP growth.