Alliance Bernstein: Follow the Earnings

Alliance Bernstein: Follow the Earnings

Chamber Member News Post Date: 08/09/17 Source: Alliance Bernstein By: Alliance Bernstein

Some investors are troubled by historically rich equity valuations in the US. Others fear that the length of the recovery alone indicates that a correction is due. And many are puzzled by the market’s apparent calm, as shown by extremely low volatility despite unnerving geopolitical and social tensions.

But we would argue that the reason for the extended rally isn’t so mysterious: The uptrend in equity markets around the world in recent quarters reflects an upswing in expected earnings growth that should continue in the near term. While earnings per share (EPS) growth and market returns are not necessarily correlated over a full market cycle, today’s modest, but synchronous, mid-cycle acceleration in global economic growth is providing support to both.

Granted, strong stock market gains over the past year may reflect much of the positive news on earnings. And earnings could disappoint loftier expectations. Also, still-modest economic growth could be stymied by policy missteps. The most significant risk, in our view, is monetary policy: Since historically low interest rates have supported the prices of stocks and other assets for years, a change to less accommodative policies must be managed carefully. Central bank rate hikes are widely expected to be gradual, well telegraphed, and appropriate to economic trends, so more rapid or larger-than-expected monetary tightening could disrupt markets.

In addition, while hopes for significant US fiscal stimulus have faded in recent months, uncertainty about the Trump administration’s tax, budget, regulatory, and trade policies— and their likelihood of getting through Congress—adds another layer of risk, as does a host of geopolitical concerns. Read Full Article