U.S. Equities: Time To Take Profits?
U.S. equities have far outpaced global benchmarks so far this year. This has caused U.S. valuation measures to become less attractive relative to many other markets, thereby raising the question as to whether it is time to rotate out of the U.S. into other bourses.
Our advice is: not yet. Thus, we remain overweight the U.S. within a global equity portfolio.
The U.S. economy has gained modest momentum this year, whereas most other countries and regions have struggled to revive. U.S. 12-month forward earnings continue to climb, whereas non-U.S. earnings have steadily eroded. A revival in the latter and/or reversal in U.S. earnings is needed to warrant rotating out of the U.S. We eventually expect the former (better global earnings) to occur.
In terms of timing this reversal, there are still few signs of a positive catalyst to spark outperformance for most non-U.S. markets, with the notable exception of Japan (where we are also overweight). The euro area and U.K. economies have at best stabilized after sliding into near-recession (Germany and the U.K.) or outright recessionary conditions (most of the euro area) in the past year. Policy reflation has been inadequate, with moderately easy monetary settings, but sufficient fiscal restraint to dampen domestic activity. All of Europe, and most of the emerging markets (EM), are waiting for external demand to lift their economies. Global trade has so far failed to take off with any vigor, although we expect some improvement in the next 6-12 months.
On the flipside, there are few roadblocks that might trip up the U.S. economy. Thus, U.S. equities face few relative headwinds, aside from being overbought. We expect to rotate out of the U.S. into some of our current underweights (EM, euro area and the U.K.) later this year, but for now are content to stick with the U.S. and Japan, along with a few other markets.
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Peter Perkins, MRB – The Macro Research Board