The S&P 500 is up an incredible 190% since its March 2009 lows. It’s up a whopping 50% since the beginning 2012.
In a new 34-page note titled “Transitioning To Lower Returns,” Barclays’ U.S. equity strategist Jonathan Glionna writes that those years of awesome returns are behind us for now.
“U.S. equities have made a remarkable advance in the past five years, recovering from the credit crisis, powering through the European sovereign debt scare, and surging on a third dose of quantitative easing, leaving the S&P 500 close to an all-time high,” he writes. “This advance was grounded in increased earnings, itself a byproduct of elevated profit margins; boosted by share repurchases, which are approaching new records; leveraged with more debt, which has never been higher; and augmented by an expansion of valuation multiples, with most now above historical averages.”
Indeed the rally we’ve experienced was well-justified. But those market drivers are losing steam.
The Missing Ingredient
“We believe U.S. equities are transitioning out of a recovery rally and into a period of lower returns as the benefits of margin expansion and share repurchases prove to be already priced in and a return of faster revenue growth becomes a prerequisite for another re-rating higher,” he wrote.
His warning about revenue growth — which he calls “the missing ingredient” — is somewhat surprising.
Indeed many market bulls brush off worries about margins and buybacks by arguing that the economy is about to reach escape velocity, which in turn will help drive sales and inflation higher. (Remember, stocks tend to be a hedge against inflation because companies have the ability to maintain earnings by passing higher costs to customers by raising prices prices.)
“Sales growth has been less than 3% and we believe it will remain subdued because of weak domestic economic growth and an inability to restart last cycle’s growth engine: international sales,” he said.
Europe, which is one of the U.S.’s biggest customers, has been reporting lots of disappointing economic data. Even once-bright spot Germany is showing the signs of an economy on the verge of contraction.
Domestically, things aren’t exactly great. A new NFIB survey revealed that 13% of American small business owners identify poor sales as their single most important problem.
Stock market valuations from a sales perspective already appear expensive.
“The last time the S&P 500’s price-to- sales ratio was higher than it is now, sales were growing at 7%,” writes Glionna.
Those Lower Returns
“We are setting our price targets for the S&P 500 at 1975 for 2014 and 2100 for 2015,” he writes.
In other words, he sees stock rallying 2% from here to the end of the year, and then rising just 6% in the following year.
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