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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,

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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:

1 April 2015 Charts of Interest

2 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, 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 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 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 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  These stocks tend to outperform when economic growth is scarce because investors place a premium on companies with rising earnings.

6 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.

7 7 Disclosure This information has been provided by RBC Global Asset Management Inc. (RBC GAM) and is for informational purposes only. It is not intended to provide legal, accounting, tax, investment, financial or other advice and such information should not be relied upon for providing such advice. RBC GAM takes reasonable steps to provide up-to-date, accurate and reliable information, and believes the information to be so when printed. Due to the possibility of human and mechanical error as well as other factors, including but not limited to technical or other inaccuracies or typographical errors or omissions, RBC GAM is not responsible for any errors or omissions contained herein. RBC GAM reserves the right at any time and without notice to change, amend or cease publication of the information. Any investment and economic outlook information contained in this report has been compiled by RBC GAM from various sources. Information obtained from third parties is believed to be reliable, but no representation or warranty, express or implied, is made by RBC GAM, its affiliates or any other person as to its accuracy, completeness or correctness. RBC GAM and its affiliates assume no responsibility for any errors or omissions. This report may contain forward-looking statements about the Fund, its future performance, strategies or prospects, and possible future Fund action. The words “may,” “could,” “should,” “would,” “suspect,” “outlook,” “believe,” “plan,” “anticipate,” “estimate,” “expect,” “intend,” “forecast,” “objective” and similar expressions are intended to identify forward-looking statements. Forward-looking statements are not guarantees of future performance. Forward-looking statements involve inherent risks and uncertainties, both about the Fund and general economic factors, so it is possible that predictions, forecasts, projections and other forward-looking statements will not be achieved. We caution you not to place undue reliance on these statements as a number of important factors could cause actual events or results to differ materially from those expressed or implied in any forward-looking statement made in relation to the Fund. These factors include, but are not limited to, general economic, political and market factors in Canada, the United States and internationally, interest and foreign exchange rates, global equity and capital markets, business competition, technological changes, changes in laws and regulations, judicial or regulatory judgments, legal proceedings and catastrophic events. The above list of important factors that may affect future results is not exhaustive. Before making any investment decisions, we encourage you to consider these and other factors. ® / ™ Trademark(s) of Royal Bank of Canada. Used under licence. © RBC Global Asset Management Inc. 2015


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