Economic resilience and global stimulus provide tailwinds for equities
Energy sector struggles and the strong dollar may dampen U.S. earnings growth in the next two quarters.
Currency stabilization, and an end to Greece's debt drama, may help investors focus on more durable questions.
U.S. stock market valuations are now approaching the top quartile of their historical averages, but remain cheap when compared with bonds.
Corporate revenue growth should continue to improve in the European and Japanese stock markets.
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- U.S. equities
- Non-U.S. equities
Lackluster results for the U.S. equity market
U.S. equities delivered flat performance in the second quarter, ending the three-month period barely in positive territory, as measured by the S&P 500 Index, which gained just 0.28%. Volatility was mostly absent, but made an appearance in the final two days, when stocks declined sharply as the Greek debt crisis escalated. On June 29, the S&P lost 2%, its steepest selloff of the year, in response to Greece's call for a July 5 referendum vote on bailout terms. U.S. small-cap stocks slightly outperformed large caps, with the Russell 2000 Index of small companies gaining 0.42%. Growth stocks outperformed value stocks, which were flat for the quarter. With very few compellingly cheap stocks to choose from and similar valuations across the equity universe, investors favored stocks that offered more growth potential. The low volatility in the U.S. equity market is an observation we have made for several quarters, and some would argue that a market as calm as this one may give way to turbulence ahead.
Despite Greek drama, strong tailwinds continue to support non-U.S. markets
For much of the second quarter, international stock investors were transfixed by Greek woes. Despite the drama, we focused on what we considered more serious risks and compelling opportunities. In the months ahead, we expect economic data to continue to improve in Europe, the United Kingdom, and Japan, but we think emerging markets are still beset by a number of economic and market risks — particularly in China. We also think equity valuations in both Europe and Japan are more attractive than in other asset classes. And in our view, the weaker euro and yen, as well as lower oil prices relative to 2014 levels, should continue to provide a boost to corporate profits.
Two other broad-based economic and market themes could help non-U.S. stocks make further gains, in our view. We think that QE (quantitative easing) in Europe and the pursuit of structural reforms in Japan will provide a boost to these markets and that government-imposed regulatory changes will also gradually enhance the health of certain industries. We also think that companies' specific restructurings, including corporate merger-and-acquisition (M&A) activity, may continue to help non-U.S. stocks advance. M&A is brisk across a variety of developed markets and is increasingly robust in Japan and Europe, particularly as company boards feel the competitive pressure to boost earnings growth.
The views and opinions expressed are those of the authors (Simon Davis and Shep Perkins, Co-Heads of International Equities, and Robert D. Ewing and Nick C. Thakore, Co-Heads of U.S. Equities) as of June 30, 2015, are subject to change with market conditions, and are not meant as investment advice.