News analysis: Bulls outweigh bears on US equities

Market experts have started to ask what potential the US market has in 2014 following its stellar 30 per cent return in dollar terms in 2013.

Stocks across the globe had a rocky start to the year with the S&P 500 not being the only index to give some of its 2013 gains back.

In addition, there is the potential for low growth in the US, a rise in interest rates, reduced support from the central bank and volatility in emerging markets potentially contributing to blowing US stocks off course.

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Analysts have been predicting a 10 per cent correction, following negative pre-announcements of company earnings (which outnumbered positive announce-ments by 7.6 to one according to Thomson Reuters) and volatility in emerging markets in reaction to the reduction of the US bond-buying programme of quantitative easing.

The market shrugged off disappointing non-farm payrolls data on February 7, ending that week at 1,797.02, up 1.33 per cent on the day. The jobs figures also failed to curb expectations that the Federal Reserve will continue its tapering of quantitative easing, following two reductions of $10bn (£6bn) in December and January.

In spite of only 113,000 net new jobs being created in January, against expectations of 185,000, fund managers remain remarkably bullish. Richard Lewis, Fidelity’s head of US equities, says: “With no inflation in the system and zero interest rates [expected] again this year, this all argues for a continuation of high profits, low growth and probably decent equity markets. I don’t think the US equity market can do another 30 per cent, but I don’t think the markets are about to give it all back.”

Such optimism may also be attributable to a strong report on US GDP for the last quarter of 2014, showing output growth of 3.2 per cent.

Paul Quinsee, JPMorgan Asset Management’s chief investment officer for US equities, predicts modest acceleration in US profit growth and that profits are roughly in line with trend, in spite of net profit margins for S&P 500 companies of approximately 9 per cent being well above their historical average. Mr Quinsee says: “The reasons for high margins are long lasting. Multinational US corporations are major beneficiaries of globalisation and technological change and that will persist over the next decade.”

The chief investment officer says his best guess for US earnings growth in 2014 is 8 per cent, helped by continued cash backs and sweetened with faster growth in dividends, as cashflows remain strong.

Ian Heslop, manager of the Old Mutual North American fund is similarly bullish. He believes that although the forward price-to-earnings ratio – a measure of a company’s stock price against its expected earnings – on the S&P 500 is now about 15.5x, the market is not necessarily expensive.

“With economic expansion and some improvement in margins, it’s reasonable to expect earnings growth in the high single digits,” he says. “The risks are that the Fed messes up, the summer numbers are too soft or too slow, and that inflation rises.”