US Stocks: Third Time’s the Charm
At 1550, the S&P 500 has regained the peak it reached in March of 2000 (when the tech bubble burst) and again in October of 2007 (before the credit crunch hit). But we think the third time’s the charm: We think the stock market still has room to rise because equities are now more attractively valued and of higher quality than they were at previous peaks.
The price is right. The S&P 500 now trades at about 13.7 times consensus estimates of this year’s earnings—below its price multiple in October 2007 and much lower than in March 2000, as the display below shows. So stocks are priced attractively, in our view.
Companies are much healthier. S&P 500 companies have much higher-quality balance sheets, with an average net debt/equity ratio of 34% today. That’s just over half the S&P 500’s debt burden in October 2007 and close to the average level in March 2000 when the index’s ratio was distorted by debt-free technology companies.
Expectations are modest. Profit margins are currently high, and are expected to decline. But there is room for sales growth to exceed the consensus’s modest expectation, which could propel earnings growth and further market gains. We see several reasons why a pickup in economic growth could increase sales and earnings.
We are currently projecting US GDP growth of 2.6% in 2013, up slightly from 2.4% in 2012 and 1.8% in 2011. It is true that cutbacks in federal government spending are creating a small headwind for the economy. But that is more than offset by the strong momentum in the private sector—particularly construction, capital spending and consumer spending.
Ultralow interest rates have kept mortgage rates at rock bottom, which has contributed to the recent recovery in housing construction and prices from extremely low levels. A sustained improvement in housing could boost consumer confidence and spending, which in turn could increase sales and earnings for companies in the homebuilding, financial and consumer discretionary sectors. Consensus 2013 earnings forecasts for the S&P 500 have risen from $107 to $109. We think earnings could rise further.
Companies have also been delivering capital back to shareholders. The S&P 500 dividend yield of 2.1% remains slightly above the 10-year US Treasury yield of 2.0%, as the display above also shows. And companies continue to both raise their payout ratios and buy back their stock. We expect this trend to continue, which should benefit equity shareholders over time.
Of course, stocks may retreat briefly from recent highs, and another shock—perhaps related to Europe’s ongoing troubles—could take away investors’ risk appetite for a while. But we see no fundamental reason to avoid stocks at current levels.
The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AllianceBernstein portfolio managers.
Seth J. Masters is Chief Investment Officer of Bernstein Global Wealth Management, a unit of AllianceBernstein, and Chief Investment Officer of Defined Contribution Investments and Asset Allocation at AllianceBernstein.