Is This As Good As It Gets for the S&P 500?

Is This As Good As It Gets for the S&P 500?

The outlook for U.S. stocks remains positive, as the “Four Pillars” of the rally remain intact:  Global central bank accommodation (this was mildly solidified last week by the ECB and the soft jobs report), a clear macro-economic horizon (also further solidified by the Ukraine/Russia cease-fire), global economic recovery and reasonable valuations.

But, one characteristic of last week’s market that I didn’t like is there was no real desire for buyers to push stocks higher. The two failed rallies at 2,010 in the SPX are representative of the sentiment that this may be as good as it gets in the U.S:  Economic growth (according to most metrics) is accelerating, but any material improvements will be met with a “hawkish” Fed.  Washington is coming back into focus via the mid-term elections (the absence of any tomfoolery from Washington has been an underappreciated tailwind for the market).  And from a valuation standpoint, even if the economic data stay “Goldilocks,” you’re buying an SPX that is trading at 15.4X 2015 earnings—again not prohibitively expensive, but not cheap, either.

Now, to be clear, I’m not saying there’s anything wrong with the market and/or to de-risk. But unless we get some additional multiple expansion by an uptick in earnings, I’m not sure what else out there is going to carry stocks higher in the near term. So, I think a consolidation/chop sideways is in order.

Adding to this is the growing attractiveness of Europe (and to a lesser extent Asia).  European stocks, while mired in slow growth at the moment, are about to see the implementation of growth-stimulating programs. Meanwhile in Japan and China, both the respective governments and central banks are intent on helping their economies.  And, the above regions trade at a significant discount on a valuation basis compared to the U.S.

So, point being, while I wouldn’t materially decrease U.S. equity allocations, I would point any new or tactical capital toward some other regions (especially Europe) as there is just a lot more room for improvement over there than there is in the U.S. at this moment.