ConvergEx Group chief market strategist Nick Colas calls the bear case for U.S. stocks “at best, a selective assessment of the facts.”
“It leverages the fact that everyone knows stocks can go down 40% because, well, they have in very recent memory,” he writes in his daily note to clients. “The short story always sounds smarter than the long case, simply because most people fear loss a lot more than they value gain.”
Colas is optimistic on the stock market — at least for now.
“Put aside the ghost stories, at least for the remainder of 2013 — there’s one more rally left in global equities, led by U.S. stocks,” he says.
In the note, he outlines the bullish case for U.S. stocks:
U.S. public companies are currently printing record profits as they report Q3 2013. With just over 25% of the S&P 500 on the books, earnings for the index look to be about $US26.72, just higher than last quarter’s record of $US26.36. Which is turn was higher than Q1 2013’s record of $US25.77. Record levels for the S&P 500, record earnings. Stock discount earnings, and earnings are currently good. What exactly is hard to understand about that relationship?
The pace of corporate earnings has been remarkably consistent for the last three years. The last time the S&P 500 printed a quarterly earnings number below $US20/share was Q2 2010 — over three years ago. So against a tepid U.S. recovery, a lousy economy in Europe, a slowing Chinese economy, and who knows what going on in the emerging markets, U.S. corporate earnings have baselined at $US80/share for the S&P 500. Against any other period of economic history, those would be called “Trough” earnings by cyclical analysts. And awarded a 20x multiple, or 1,600 on the S&P — which is pretty close to where we are now.
Now, you might argue that the Fed’s extraordinary liquidity measures have artificially boosted demand, but there’s precious little proof of that. Revenues are essentially flat, about where you would expect to see them with the 150,000-200,000 monthly gains in jobs we’ve seen in the U.S. over the past two years. Inflation isn’t muddying the waters here either, unless you have to pay for a child’s college education or health care for a family member. Auto demand is back to “Normal” levels — in line with scrap rates — and the housing market is back to where it was in 2005/2006, despite close to decade of population growth.
Colas thinks corporate earnings are just too good for investors to “walk away from an investment class that is clearly working.”
“I very much doubt the bear case for stocks will make itself plain in 2013,” he writes. “Could there be a huge selloff in 2014? Sure. It will not, however, come from a well-known and broadly understood vector such as Federal Reserve monetary policy. And it will have to be a series of events which break the ability of U.S. corporates to earn strong profits in weak economic times.”
“Until then, however, this red-headed bull market will very likely live on, disrespected but resilient,” says Colas.
Société Générale strategists disagree.
The SocGen asset allocation team predicts the S&P 500 will fall by around 15% when the Federal Reserve winds down its quantitative easing program, then go nowhere for years.
The bank is calling for clients to rotate out of U.S. stocks and into European and Japanese equities, which they believe will assume leadership in the global rally going forward.
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