Where next for US equities?

Did you know the S&P 500 index of US equities has tripled in value since its low point five years ago?

The index closed above 2,000 points for the first time yesterday, up by 300% since it recorded an intra day low of 666 points on 6th March 2009.

Since the start of 2012, the S&P 500 has returned 59%, with a 40% return since the start of 2013 and an 8% return since the start of this year.

So where next for US equities, now that they are no longer considered to be cheap based on most valuation measures? Particularly given investor concerns about US monetary policy normalisation?

A new briefing note for advisers from Fidelity Worldwide Investment has made the case for a multi-year US bull market being sustained.

Dominic Rossi, CIO Equities, Fidelity Worldwide Investment, said:

“Despite the strong recovery of the past few years and the S&P 500 reaching the key 2,000 landmark, I remain bullish on the outlook for US equities and feel the strength and duration of the resurgence will surprise many investors.

“Equity market volatility remains anchored and the outlook for the US economy is supported by a number of positive structural factors, including the shale boom and the improving budgetary position.

“The earnings outlook also remains favourable and I think that those analysts that are arguing that US profits can’t go higher are very likely to be proved wrong.”

Peter Kaye, portfolio manager of the Fidelity American Fund, said:

“Despite US equities hitting record highs, I do not think that valuations are overextended compared to history.

“As always, it is important to consider the context – we are still in an environment of record low interest rates and the US earnings outlook is both robust and improving.

“Moreover, the broader US economy is supported by a number of structural factors such as the shale boom and corporate confidence is at its highest for a long time as evidenced by the marked pick-up in M&A activity.”

The shale boom, a positive earnings outlook and greater mergers & acquisitions activity.

These are all positive factors which could contribute towards a strong performance for US equities in the future.

However, equities are never without risks.

In the US, we have already seen how investors behaved at the first hint of quantitative easing being slowed, not even withdrawn.

Once the Fed (eventually) announces and then implements plans to fully withdraw this support for the markets, positive factors such as a shale boom could pale into insignificance.

Investors should be sensible about their allocations to equities and the US region specifically, ensuring they balance allocations across a diversified portfolio and draw up an asset allocation which meets their overall financial objectives.

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