Why the US Stock Market Rally is Not to be Trusted

The S&P 500 is up 250 points in the past two months but Neuberger Berman warns this rally lacks conviction and is really a response to the excessive pessimism of the New Year

External Writer 19 April, 2016 | 3:10PM
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Morningstar's "Perspectives" series features investment insights from third-party contributors. Here, Joseph Amato, president and chief investment officer of equities at Neuberger Berman urges investors to exercise caution during this US ‘relief rally’.

Traditionally, equity people are supposed to be more optimistic than bond people, but I am prepared to buck the stereotype just a little as we begin the first quarter earnings season. I am not about to argue that we have inflated a bubble and stand on the brink of savage correction. Nonetheless, I think it is fair to say I am a little more circumspect.

The market pendulum tends to swing too far in both directions. Does the simple recognition the world is not about to end explain why the S&P 500 Index went up more than 15% in 10 weeks? At 17-17.5 times forward earnings, US large caps will not look particularly cheap should run-rate earnings for the first three months of 2016 come in at around $100-$105 per share, as seems likely. That is a long way from the $120-$125 per share that we feel is required to support today’s multiples.

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