This article is part of Morningstar's "Perspectives" series, written by third-party contributors. Here, Ignis American Growth Fund manager Terry Ewing explains why the best is yet to come from across the pond.
This year has proved profitable for investors in the US market. The S&P hit new highs through the first half of 2013 - and we believe the wealth effect from housing, the stock market, and employment growth will continue into 2014.
Such is our conviction, we have recently added domestic turnaround story Best Buy, the American multinational consumer electronics corporation to the fund.
We expect specific cyclical sectors to lead the market over the balance of 2013, as we anticipate a steepening yield curve, rising personal consumption expenditure trends and an improved capital spending picture in 2014.
The market has plenty of reasons to find support at these levels, and assuming yields do not continue to rise at a similar pace, the economy is on a reasonable footing going into the second half of the year.
We think that consumer spending should be aided by recent CPI weakness, and that mortgage rate rises will not imperil the continued rise in house prices. Evidence from prior cycles gives us comfort that when job growth is positive and house prices are rising, absolute mortgage rates become less relevant.
Dividend pay-out ratios have fallen to the lowest on record, yet dividends grew at 15% in 2012. We expect 16% dividend growth in 2013 - good news for income seekers.
Recent GDP growth figures from the US were strong, which we think will continue thanks to the housing recovery - now in its second year, and the beginning of the non-residential construction recovery.
The benefits of the shale gas discoveries continue to trickle down into the economy, with a boom in energy infrastructure. The impact of cheap energy has meant good news for consumers, but also a renaissance in manufacturing.
While the debt ceiling raise needs to be agreed in Washington later in the year, we still anticipate GDP growth at 2% for 2013, with Q4 growth exceeding 3%.
Investors should expect 10 year bond yields to continue rising to 2.8% by the year-end, while S&P earnings will be approximately $112 and $125 in 2013 and 2014 respectively. Applying a fair value forward PE of 15x, this yields a yearend target of 1875 for the S&P 500.
With muted inflationary pressures, we expect equities to be re-rated higher when the market realises the Federal Reserve is serious about maintaining interest rates at its current level for an extended period.
Broadly, we think that the market valuation is reasonable, and we think that the earnings estimates for various subsectors may prove too low if the economic momentum continues. Therefore, we think that the market can continue to make ground and we have a positive beta slant to the portfolio, mostly concentrated in domestic cyclical companies.
