UBS House View Daily

Thought of the day

28.08 - Equities can continue to grind higher

US Federal Reserve Chair Janet Yellen’s restraint on monetary signaling at Jackson Hole gave US stocks another boost on Friday, helping deliver the S&P 500’s best weekly gain (+1.4%) since mid-July. That extends the current bull market to nearly 101 straight months, surpassed in length only by the 113-month run leading up to the dot-com crash. Skepticism over valuations is even higher now – with a record 46% of investors believing equities are overvalued, according to the latest BAML fund manager survey.

But while the bull market may be entering the later stages of the cycle, we believe it can run further:

  • The earnings yield on the S&P 500 is 4.8% compared with a yield of 2.17% for 10-year Treasuries.
  • At 18x, current equity P/E ratios are near long-term averages. Historically when valuations have been in an 18–23x range, the MSCI AC World Index has returned 6% over the subsequent six months (versus an overall average of 5%). And relative valuations of equities also suggest long-term outperformance versus bonds, with an S&P 500 equity risk premium of 4.5% versus a long-term average of 3.6%.
  • Corporate earnings growth remains robust too, at 12% in the US and around 10% in the Eurozone in the last quarter. Synchronized global growth should continue to support this, with all 45 OECD economies on track to expand this year.

So we maintain our overweight on global equities in our tactical asset allocation. For concerned investors, diversification appears a preferable option to expensive hedging or an outright exit from stocks.

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