The US equity market looks expensive compared with history, but technological changes and low bond yields paint a different picture, according to the guests on the latest FTAdviser Podcast.
Nathan Sweeney, a multi-asset fund manager at Architas said the gains in the US market had been driven by a combination of large technology companies, and the low interest rate policies of central banks.
With the US Federal Reserve having cut interest rates in response to the coronavirus, central bank support for markets is continuing. By cutting interest rates, the yield on US government bonds falls, and this makes the income available on US equities relatively more attractive.
Mr Sweeney said that while big tech companies had driven the market higher, there were many other sectors within US equities that were not as expensive, including financials, as they have not benefitted from the rise in markets.
Julian Cook, US equity portfolio specialist at T Rowe Price said there is a “misconception” that large cap US technology companies were expensive. He said that while share prices had risen, their cash flows had risen at a faster rate.
Eric Papesh, who is also a US equity portfolio specialist at T Rowe Price, said: "In the conversations we are having with clients, valuations are pretty frequently cited as a point of concern. And I wouldn't say by any measure that valuations at the broad US equity level are compelling just in and of themselves.
"So on a price to forward earnings multiple, roughly 18 to 19 times, which is expensive compared to where the market has traded over most of the last 15 or 20 years. I think if you look across different parts of global capital markets that same argument would hold or that same case would be true. So most segments of capital markets are rich versus where they traded over the last 20 years.
"So the question to some extent is: valuations relative to what? If you compare the dividend yield on the S&P 500 today it is actually 100 basis points higher than what you are seeing on the 10-year Treasury and the last time that gap was as wide as it is today was in December 2008 so not all valuation measures give you the same conclusions."
"And then I would also add just within the US equity market, it is an exceptionally broad market index so obviously there are pockets that we think, just from a valuation perspective are more or less compelling at any given time."
This week's edition of the FTAdviser Podcast is sponsored by T Rowe Price. Listeners to this week's episode can also bank 30 minutes CPD by answering the multiple choice questions below.
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