The S&P 500 closed at a new all-time high on Friday night and the ASX has performed well over the past year back at pre-GFC highs but Data Bassanese, chief economist at BetaShares, says the market “faces a tough road ahead”.
Bassanese says that “a major theme from the latest earnings reporting season is that profits were not as bad as we thought they would be” but there were reasons for concern because earnings were being held up “despite general weakness in top-line sales growth”, which means cost-cutting is driving the reported numbers.
Bassanese says this is not sustainable long-term and highlights that as a result “earnings growth expectations remain under downward pressure and now imply on 6% growth in forward earnings by mid-2015”. He expects further downgrades remain more likely than upgrades.
On the valuation front, Bassanese says that at 15.3 times forward earnings, the PE ratio is above the 10-year average of 13.6 and at a price that it has held only 10% of the time since 2003. He says the recently local and global bond market rally has helped ease pressure slightly, but when the Fed starts raising rates in 2015 it will further pressure market valuations.
It all adds up to a market that could be heading for a “slow grind”, according to Bassanese.