The S&P 500 notched its eighth successive quarter of gains in the third quarter, only the fifth time the index has produced such a long winning streak since data began in 1928.
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The rally is now the second-longest and the third-strongest on record. While the length and extent of the rally is causing some investors to think a downturn is overdue, UBS Chief Investment Office (CIO) believes it isn’t time to exit from risky assets:
● Equities are no longer cheap – the current global price-to-earnings ratio of 17.8x is close to the long-term average of 18x – but valuations are consistent with further gains. Historically, the MSCI All Country World Index has returned 6% on average over the subsequent six months when valuations have been in the 18–23x range, versus an overall average of 5%.
● Earnings growth is likely to drive further stock market gains. S&P
500 earnings, for example, grew at a double-digit rate in the first and second quarters, the first back-to-back quarterly double-digit expansion since 2011. CIO expects both US and Eurozone earnings to grow by 10–15% this year.
● Central banks are moving away from monetary accommodation, but only very gradually. Higher rates need not prevent further equity gains. Since the Federal Reserve started raising rates in December 2015, global equities have advanced by 29%.
So CIO expects equities to continue to grind higher. CIO expect to see returns in a 2–4% range over the next six months and remain overweight global equities.