“The market has rebounded more than 20% since the vaccine news in early November – on top of a huge shift from the April 2020 lows,” said Jeff Agne, Managing Director at Rothschild Asset Management, based in New York and Co- Portfolio manager of the company’s large cap value products.
Agne also noted high valuations, with the S&P 500 trading roughly 20 times the consensus estimate of earnings per share for 2022 – a premium over the historical average.
Just before the dot-com bubble burst more than two decades ago, the S&P 500’s forward multiple hit 24x, he said, although the two time periods have many differences and cannot be directly compared.
However, despite the increased valuations, today’s valuations are at least partially backed by massive fiscal and monetary stimulus, said Agne, whose firm manages the Renaissance US Equity Value Fund. Additionally, the economy should offset above-trend growth during the post-pandemic recovery.
In April, the IMF updated its economic growth forecasts, with US growth this year estimated at 6.4% and Canadian growth at 5%.
Agnes said he expects further upward revisions in US GDP that “could support the market at current levels and lead to another uptrend”.
He also expects further upward revisions to corporate earnings estimates for 2021 and 2022, which will move the market higher.
“We are optimistic about corporate earnings, which are ultimately a big driver of stock returns,” said Agne. At the same time, he added, “A lot of good news now looks discounted in stocks, which would suggest some contraction in valuation multiples over the course of the cycle.”
The market cycle is currently in its middle innings, estimated Agne. Reopening trades – airlines, restaurants, hotels, retailers – have “rebounded” over the past six months and consumers remain cluttered with cash. “People are ready to go out and spend money,” he said.
Consumer demand cannot be fully met due to shortages in some areas, from steel to semiconductors. “Covid has used up much of inventory and various supply chains around the world and it will take time for that to normalize,” Agne said. “That’s one of the reasons we think we’re going to get into the middle innings of the cycle.”
However, prices are rising and the biggest risk to the market is that inflation could force the Fed to end its bond purchases earlier than expected, Agne said. The consensus for the Fed is expected to expire later this year or early 2022. Fed officials meet this week, with an interest rate decision and updated forecast, on Wednesday.
Should the Fed rejuvenate earlier and be perceived as being behind the curve, “we believe the market will not respond well to this, especially given that interest rates are near historic lows,” said Agne.
In the US, prices rose 0.6% in May and 5% last year – the biggest 12-month jump since 2008.
“Stock markets weren’t exactly excited by hotter than expected [inflation] Profits, ”wrote BMO economist Carl Campus in a weekly stock report. Market performance last week reflected the central banks’ mantra that inflation will be temporary, he said.
Agne said he remains constructive on stocks from today’s perspective. “Economic momentum continues to pick up, GDP growth accelerates, credit growth remains very healthy, profit margins are near all-time highs and the Fed remains accommodating,” he said.
In the longer term, the threat of higher inflation and a less accommodative environment speak in favor of a barbell approach to investing, said Kevin McCreadie, CEO and CIO at AGF Management Ltd., in a recent blog post.
This approach “emphasizes quality stocks, but also doesn’t unduly differentiate between growth or value or any other issue at the expense of adequate diversification,” said McCreadie.
“Investors need to be careful chasing after realized returns rather than trying to get what comes next by carefully analyzing current valuations and fundamentals of individual companies.”
This article is part of the AdvisorToGo program sponsored by CIBC. It was written without the involvement of the sponsor.
source https://dailyhealthynews.ca/equities-climb-could-continue-advisors-edge/
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