Equity Outlook

Key takeaways

  • While the U.S. market took investors for a bit of a wild ride, the downturn was not particularly surprising.
  • China's economic slowdown has exposed economic vulnerabilities across emerging and developed markets.
  • U.S. stock market valuations are now approaching the top quartile of their historical averages, but remain cheap when compared with bonds.
  • Amid growing risks in emerging-market economies, stocks still appear relatively cheap — particularly in relation to bonds.

Q4 2015 Equity Outlook

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Earnings growth under pressure
Bob Ewing, Co-Head of U.S. Equities, says earnings growth is relatively flat, but still positive.

Fundamentals, valuation, and sentiment point to solid market foundation
Nick Thakore, Co-Head of U.S. Equities, believes the foundation of the market is solid, despite the August correction.

  • Overview
  • U.S. equities
  • Non-U.S. equities

The long-anticipated correction arrives for U.S. investors

U.S. equities endured their most challenging quarter in years, and the market's extraordinary advance of previous quarters came to an end with significant volatility. The turbulence peaked in August with some of the biggest swings in the history of the market, including a historic 1,000-point intraday plunge for the Dow Jones Industrial Average on August 24. For the first time since 2011, major U.S. equity indexes experienced a correction, defined as a decline of 10% or more from a recent high. Stocks recovered from their August lows and ended the quarter with a decline of 6.44%, as measured by the S&P 500 Index. While many U.S. equity investors were unnerved by the sharpness and speed of the third-quarter decline, we believe the downturn was more notable for the length of time it took to arrive.

China leads global stocks astray

China's surprise currency devaluation sparked the recent selloff in global equities, but market observers are still struggling to gauge the level of China's economic distress. Ominously, the Chinese government tried various policy tactics, including interest-rate cuts, stock market interventions, and more spending, but these efforts to restimulate growth and calm investors generally failed to halt the market rout. So it is difficult to say if the worst is over, but we do expect more volatility in global markets in the months ahead.

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 September 30, 2015, are subject to change with market conditions, and are not meant as investment advice.