EC Is Today’s Bull Market Sustainable?

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PE ratio by stock index

Source: Refinitiv DataStream, Russell Investments. Based on 20 years data as of May 2021, except for Pacific measured from June 2010. Equity region based on respective MSCI Index. AC= All Country, PE = Price to Earnings, LTA = Long Term Average.

The bottom line: Positive outlook for stocks

So, to answer our original question, is the current bull market sustainable? Considering our positive business cycle outlook for the global economy, very low odds of a recession over the next couple of years, accommodative monetary policy, and encouraging earnings prospects, we believe the balance of risk for equities is to the upside. Still, the outlook is not without risks, and several are worth highlighting:

  1. Pandemic – We believe the worst is in the past, but vaccinating the world will take time, which means certain parts of the globe will remain vulnerable come next flu season. Virus mutations are another wildcard.
  2. Taxes – U.S. President Joe Biden's ambitious spending objectives indicate taxes are likely to head higher for corporations and individuals. This introduces some vulnerability to equity markets.
  3. Debt – U.S. household balance sheets are a bright spot; however, high corporate and government debt poses some risks to future growth. However, with interest rates expected to remain low over the forecast horizon, this is not an immediate risk.

The key takeaway is that economic output and corporate earnings are projected to grow above-trend over the next couple of years. Valuations, however, are a concern, as much of this outlook is now reflected in the current valuation. Nevertheless, a favorable business cycle means a recessionary bear market is very likely not around the corner—which keeps us constructive. However, some moderation in price advances is a reasonable expectation, if only to allow earnings to play catch-up to equity prices. Overall, we remain positive on equities, especially for regions outside the U.S. due to their greater cyclicality and relative value.

1 US equity = S&P 500 Index; global equity = MSCI World ex-USA Index.

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These views are subject to change at any time based upon market or other conditions and are current as of the date at the top of the page. The information, analysis, and opinions ...

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