US Equities Offer Lower Returns

Despite a strong economy, a period of higher volatility seems likely as US equities face a number of challenges. Could the S&P 500 be due a correction?

Andy Brunner 20 October, 2014 | 3:50PM
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The US is leading a modest rebound in the global economy which most commentators expect to continue through next year.  Despite this, a period of higher volatility seems likely as US equities face a number of challenges, not least being they are fairly fully valued, and have avoided a correction for several years.

Another key challenge now facing the US equity market is the end of QE, with investors rightly concerned about the Fed’s campaign to normalise interest rates and the consequent impact on financial markets. The dollar’s recent surge is one manifestation although, as yet, bond yields have yet to rise as they have at similar junctions in the past. Higher yields have probably only been delayed and most commentators expect them to rise gradually over the next six-nine months.

Can the US equity market cope with these trend changes? In the medium term the answer is probably yes, as long as consensus expectations for economic growth and inflation are realised, external factors are not overly destabilising and corporate continue to deliver progressively higher earnings. But, the QE driven, low volatility ‘period of certainty’ enjoyed for most of the past two years is at an end and investors should be prepared for a period of lower equity returns, higher levels of volatility and even the odd correction.

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The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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About Author

Andy Brunner

Andy Brunner  is Head of Investment Strategy, Morningstar UK