US companies are delivering sufficient earnings growth to push the S&P500 further beyond the psychologically important 2000 level, which was breached intra-day earlier this week, according to Patrick Moonen, senior multi asset strategist at ING Investment Management.
The future direction of the S&P500 will primarily depend on the growth in earnings but fortunately, Q2 earnings data shows this growth is coming through as a result of a strong economy. The actual Price/Earnings ratio is unlikely to move significantly higher though as the Federal Reserve continues its gradual move back towards monetary normalisation.
Earnings could grow by as much as 7% per annum in 2014 and 2015, other support factors may be the increase in M&A activity and companies spending more of their large cash piles through equity buy-backs and dividend increases. The biggest threat for the market would be an unwarranted monetary tightening.
Globally, equities are likely to ‘grind’ higher, hopes for monetary policy easing in Euroland and Japan, together with higher earnings growth globally and continuing high equity risk premiums beyond the US, will support stock markets.
Regional differences remain, however. The Eurozone is the most vulnerable to a shock given its structural problems, including balance sheet constraints, labour market weakness, low profitability and poor competiveness. Reforms will be needed to resolve these issues.
While Europe is sensitive to the Ukraine crisis, geopolitical risks only have a lasting negative impact if they lead to higher energy prices or tighter financial conditions, neither of which are currently present.
We have a preference for markets beyond Europe that have more robust growth outlooks. We expect the ECB to embark on a US-style QE path, which might be a game changer but the timing is still very uncertain.