Presentation on theme: "April 2015 Charts of Interest. 2 Soaring Valuations, Stalling Momentum? Since its post-financial crisis nadir in March 2009, the S&P 500 Index has soared,"— Presentation transcript:
2 Soaring Valuations, Stalling Momentum? Since its post-financial crisis nadir in March 2009, the S&P 500 Index has soared, rising over 180% and delivering nearly 20% compound annual returns as of the end of March, 2015. While corporate profits have grown substantially over that time, almost 50% of the increase in the Index’s value has been driven by soaring valuations. Price/earnings (P/Es) levels have increased along with stock prices, rising to well beyond historic levels. Importantly, much of the valuation stretch has been focused in mega-cap and value stocks. S&P 500 Equilibrium Source: RBC Global Asset Management
3 Earnings Growth Drives the Majority of Long-Term Returns Over the long term, the majority of equity return contributions are driven by earnings rather than P/Es ratios or valuations With valuations now stretched, the S&P 500 Index must rely on increased earnings to continue its momentum. Source: S&P, Thomson Financial, FactSet and RBC Capital Markets Note: Based on returns since 1965 Historical return contributions (%) from EPS and P/E
4 The Challenge: After a Great Run, Where to Find Value? With global growth still sluggish and the U.S. dollar hurting exporters and foreign earnings, consensus earnings estimates for the S&P 500 Index stocks are falling. In light of this challenge, investors are shifting their investment focus, moving away from mega-cap and value stocks.
5 Shifting outlook: Investors move to growth stocks for value While the S&P 500 Index has moved sideways since the start of the year, there have been significant changes within the underlying Index. In the current low-growth environment, investors have shifted from value to growth stocks in 2015. These stocks tend to outperform when economic growth is scarce because investors place a premium on companies with rising earnings.
6 Casting a broader net for opportunities The rise in the U.S. dollar means that larger multinational firms are facing a headwind to earnings, so investors have moved out of mega-cap stocks and into smaller companies that typically have less foreign exposure. Since the S&P 500 Index is a cap-weighted index, the smaller companies have less impact on the overall index. In yet another example of the importance of diversification, investors who properly diversify their equity holdings by style and cap-weighting should benefit. And, if economic growth re-accelerates as we expect, we could see the mega-cap companies resume leadership and push the overall index higher.