For the past few years the soothsayers have labelled the US market as expensive and due for prolonge...
For the past few years the soothsayers have labelled the US market as expensive and due for prolonged underperformance and yet the market pushes on to new highs and new valuations.
Global growth is the latest change in the macroeconomic background which is expected to bring to an end the terrific run this market has had. The feeling is that a resumption of global growth will trigger inflation and this will kill off the US market and bring down with it all the growth stocks.
We agree that the global economy is becoming a friendlier place and there will be more companies generating profits and these profits are accelerating.
However, we do not believe that inflation is about to leap out of the box and, that armed with record high P/E ratios, will kill the US market. We do acknowledge that there are risks out there, but when have there not been risks?
With signs of recovery in Asia, and perhaps even Japan, the outlook for global profits has improved. This trend is good news for US companies which have been investing heavily in the region throughout the Asia crisis.
It is interesting to note that GE's very strong profits were in part attributable to a fantastic performance from its Asian division. At the same time retailers such as Wal-Mart and The Gap have invested in Korea and Japan, respectively over the last few years. US companies account for 45% of global profits and almost 30% of global GPD.
Second quarter earnings are in full flow. It is expected that earnings will be up 10% to 12% and third quarter earnings will rise 20%. Earnings expectations are rising. Remember at the start of the year there were expectations of zero profits growth this year, now we are looking at 12% growth. The US market will now demonstrate that despite the age of the bull run the market is still made up of stocks that deliver strong earnings growth.
There is a constant fear of inflation especially as the world is heading towards synchronised growth. However, improvements in productivity continue to be underestimated. For example, the full impact of the internet has yet to be quantified. Its impact on business-to-business commerce will be enormous. Most significantly, it will continue to exert terrific downward pressure on prices. This is a medium term dynamic but it is being felt already.
We remain positive on the prospects for the US market. However, there are risks, and these risks are closely interlinked. The bond market is wary of Fed policy and valuations. The market has been faced with dilemmas for the last few years but one thing in particular has remained true. Strong companies which are dominant in their field, deliver consistent earnings.
David Currie is head of the US Department at Edinburgh Fund Managers
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