This post was originally published on this site
Looking for 10% return over the next six months? Look no further than the U.S. stock market.
Yes, the American benchmarks may have consistently set fresh all-time highs over the past weeks, but the rally isn’t over yet, according to Jim McCaughan, CEO of Principal Global Investors, which oversees $424 billion in assets.
“In the U.S., this is the bull market that nobody loves. It has been going on since 2009, but there are a lot of people on the sidelines that have been cautious about it,” he told MarketWatch at the International FundForum conference in Berlin earlier this week.
“But the market hasn’t gone to bubble levels yet. It hasn’t gotten to the point where we say its ‘1999 overvalued.’ That was when P/E forwards of 50 times were common and the average P/E now is 18 times. It’s high, but it’s not high compared with where bond yields are. I’m still of the view that U.S. equities remain a buy on setbacks,” McCaughan added.
P/E refers to the price-to-earnings ratio—a popular measure of equity valuation.
“Don’t chase the market up, it’s late stage of a bull market, but it’s not over yet.”
On Wednesday, the Dow Jones Industrial Average DJIA, -0.14% notched its 20th record in 2017, while the S&P 500 SPX, -0.37% scored an all-time closing high on Tuesday. But, the Nasdaq Composite Index COMP, -0.74% has recently suffered from a technology-driven selloff, but is only 2% from its June 8 all-time high.
“Don’t chase the market up, it’s late stage of a bull market, but it’s not over yet,” McCaughan said.
The record-setting streaks, however, have raised questions among investors about how long this bull market can continue for. The latest fund-manager survey from Bank of America Merrill Lynch showed earlier this week that a net 84% of respondents think the U.S. is the most overvalued stock region, while a net 15% of investors are overweight the region.
By comparison, a net 58% of investors are overweight European stocks and a net 18% think the region is undervalued. Several fund managers at the conference in Berlin were also cautious on U.S. equities, keeping underweight positions.
“If you look at the relative flows versus valuations and the relative margin expansion compared to the U.S., European stocks have scope to improve. We are underweight the U.S., but overweight Australia, Canada, Switzerland and Europe,” said Michael O’Sullivan, chief investment officer at Credit Suisse International Wealth Management.
10% gain for U.S. stocks?
But McCaughan disagrees. He said U.S. stocks could rise between 10%-20% in 2017, setting the S&P and Dow average up for a more than 10% rally in the second half of the year in a best-case scenario. They are both up roughly 8% in 2017 so far, partly because of the enthusiasm on hope that President Donald Trump can deliver on a raft of pro-Wall Street promises, including tax cuts, deregulation, and infrastructure spending.
However, Trump’s administration isn’t the reason the Principal Global Investors boss is upbeat on the country’s equities.
“My basic argument on the U.S. is that it has a very strong private sector. And in some way that will succeed in spite of Washington and not because of it,” McCaughan said.
“And I don’t see why next year shouldn’t be another good year, depending on how companies do,” he added, referring to coming quarterly results, which has been better than expected.
Bernard Aybran, deputy CEO for Invesco Asset Management, agreed that the strength of U.S. companies is a bright spot in investing right now. That’s why he pointed to the small-caps Russell 2000 index RUT, -0.79% as one of the most overlooked investment opportunities right now. The Russell 2000 is only up about 3.7% so far in 2017, compared with its larger-cap brethren.
“If you look a the open positioning in the futures market, [the Russell 2000] is very much shorted. It’s one of the most hated asset classes these days, but there’s still a lot of good quality companies, that at some point could benefit from the strong economy in the U.S.,” he said.