Why US equities are worth another look
How a recent policy U-turn by the Fed might impact investors.
From US equities to the wider US economy, we take a quick overview of the world’s largest economy in light of the Federal Reserve’s recent policy U-turn.
US equities set to be boosted by Fed’s policy U-turn
At the start of 1Q19, we advised investors to keep faith in US equities despite the sharp drops seen in December 2018. Our rationale at the time was (1) The wider US economy remained healthy and supportive of further corporate earnings growth; (2) US equity valuation has historically undergone substantial expansion after a bout of sharp contraction in the previous year; and (3) Fund flows were stabilising.
True to form, the S&P 500 rallied sharply early this year, reversing the losses of December 2018 on the back of resilient corporate earnings and increase in valuations. This came about despite lingering trade war uncertainties. A common refrain about the trade tension is the detrimental impact it will have on corporate earnings. However, despite the slew of trade measures that have already been announced and implemented, the operating performance of US companies remained broadly strong.
Looking at the bigger picture, the US economy began 2019 in downbeat fashion as macro data releases came in largely below experts’ forecasts. We expect US macro momentum to stay subdued as long as trade tensions remain. The stock market, however, has priced in much of this economic slowdown. This is evident from the relative performance of US global cyclicals over non-cyclicals, which hit a trough in late-2018 and the ratio is currently on the rebound.
In terms of monetary policies, the recent dovish tilt in the US Federal Reserve’s policy stance has put “quantitative tightening” (QT) by the US central bank on hold, at least for now. We believe these policies will provide medium-term support for US equities. Since hitting a trough on 24 December 2018, the S&P 500 has rallied sharply amid subdued US Treasuries 10-year yield while valuation remains broadly in line with the long-term average.
We believe that the combination of a dovish Fed and fair valuations justifies an optimistic attitude to the US market.
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