UBS House View Daily

Thought of the day

20.07 - Can equities defy the pessimists?

With the S&P500 hitting a new record high on 19 July, US technology stocks surpassing dotcom-era peaks, and volatility testing new multi-decade lows, investors are understandably growing more nervous about the longevity of the rally. Bank of America Merrill Lynch's most recent fund manager survey, released on 19 July, showed that rising bond yields and the risk of a policy mistake were the concerns most prominent in investors' minds.

But while some degree of caution is warranted, we believe that several factors should continue to support markets:

  • Strong earnings: The US second quarter reporting season is underway, and we expect earnings per share (EPS) growth of 9–10%. That would be down from the 15% pace for the first quarter, reflecting tougher year-on-year comparisons. Even so, profit growth remains healthy, driven by strong domestic demand.
  • Valuations: Relative to bonds, equities still show good value. The equity earnings yield for the MSCI AC World Index stands at 5.6% based on 12-month trailing EPS, well in excess of 10-year government bond yields – 10-year US Treasuries, for example, offered a yield of 2.27% on 19 July.
  • Supportive policy: Levels of monetary stimulus remain high. Taken together, the European Central Bank, Bank of Japan, Federal Reserve, Swiss National Bank, and Bank of England have added around USD 1.8 trillion of new money to the global economy in the past year, a pace of stimulus that matches 2008's financial crisis levels.

We remain overweight global equities.

Chart of the day

Can equities defy the pessimists

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