US equities: Opportunities amid turbulence

GLOBAL markets are at a crossroads, reflecting deep concerns around inflation, interest rates, moderating economic growth, and elevated geopolitical uncertainty in Europe as it pertains to the Russia-Ukraine war and its potential ripple effects. Market sentiment has swung dramatically, from bullish peaks in 2021 to extremely bearish levels in recent weeks. Indeed, sentiment indicators are close to the lows of 2009. This is notable considering that the state of the economy today is certainly stronger than in 2009, when the US economy was reeling from the impact of significant financial imbalances and an imploding housing market.

In our view, the sentiment indicators reflect anticipated economic headwinds ahead and an expectation that consensus earnings estimates could be revised lower in the coming quarters. In aggregate, we believe S&P 500 earnings growth will face pressure in the second half of the year, but should remain positive in 2022.

Valuations have rapidly contracted over the last 6 months; the forward price-to-earnings (P/E) ratio of the S&P 500 Index has returned to pre-Covid-19 levels and is trading about one standard deviation below its past 5-year average. Stock price pressure has largely been driven by multiple compression as interest rate increases have impacted discount rates and, in turn, reduced what investors are willing to pay for future earnings. While this is appropriate to some degree, it is notable that the profitability and earnings power of many companies remain intact and earnings reports have been resilient across many sectors. In our opinion, recent volatility has created interesting opportunities in the market for long-term investors who are able to look through the near-term turbulence and focus on the growth opportunity of future years.