1- Sentiment is far from euphoric
Wall St. sentiment is at bearish extremes, with strategists recommending just a 52%
stock allocation. When strategists have been as or more bearish in the past, the S&P
500 has gone up over the next 12 months 98% of the time, with avg. returns of 27%.
2- Fund managers are close to 5% cash
BofAML’s latest Global Fund Manager Survey suggests cash balances remain high
at 4.7%, still in “buy” territory and represent money waiting to be put to use.
3- The Great Rotation hasn’t happened yet
Since 2009, equities have seen less than $500bn in inflows, compared to over
$900bn for bonds. The Great Rotation out of bonds into stocks has more to go.
4- S&P is 60% less levered than at prior market peaks
The S&P 500 has cut its leverage ratio to just above a third of its ‘00 and ‘07 levels.
5- US corporates are awash in cash
Unlike the US government or consumer, US corporates have delevered and are
flush with cash.
6- Best income growth story around
Nearly half of the S&P 500 pays a dividend yield above the 10-year Treasury yield,
close to its 3-decade high, and the S&P 500 payout ratio sits near century lows.
7- Valuations aren’t stretched
The S&P is trading above average on P/E, which concerns investors. But on Price
to Free Cash Flow, Price to Normalized Earnings—a more predictive valuation
metric—and EV/EBITDA, the S&P 500 still looks attractive.
8- US is the biggest innovator…and innovation adds alpha
US R&D to GDP has been rising over time, and the US spends more on R&D than
any other country including China. And R&D spenders typically outperform.
9- Best-in-breed equity index
US stocks trade at about a 10% premium to global equities, but in our view that premium
is warranted: the US has a higher ROE, lower beta, and has a significantly higher
proportion of “B+ or Better” ranked stocks (stable earners) than global benchmarks.
10- Lower oil and Global QE bode well for future earnings
If lower oil prices and further easing from global central banks can stimulate global
growth and reduce the risk of a global slowdown, we believe this is likely to more than
offset much of the short-term hit to Energy profits.
Time is the best arbitrage opportunity for stocks
While there may be risks to near term performance of the S&P 500, for stocks,
extending one’s holding period has proven profitable. The probability of negative
returns significantly decreases as time horizons increase. For other asset classes,
this is not the case.