2016 Outlook: EPS and Sentiment to Trump Rates
Prospects for an imminent rise in US interest rates need not undermine stock prices.
Sentiment took a beating in the late summer selloff and we now know non-resident investors were very heavy sellers: history shows positive returns from such episodes.
Global growth of 3.4% next year, and an expected removal of the Oil price drag, should mean earnings growth recovers to 7% in 2016.
Most global valuation measures are “in-line” or slightly below historical norms, and therefore no barrier to performance if the earnings are forthcoming. Indeed the global market is cheaper now than at the start of previous US tightening cycles.
We do think Fed policy could impact leadership within the market. In the past, higher rates have favoured value over quality and growth, while inhibiting the performance of early cycle cyclicals, such as Consumer Discretionary.
Higher US rates and superior EPS growth should also encourage leadership amongst non-US equities.