A December Fed rate hike, uncertainty regarding the US presidential elections, weak earnings growth, diminished buyback activity and concerns about European banks pose near-term risks to global equities.
Read Interview with OECD's William White on the Negative Side Effects of Ultra-Easy Money
The summer rally has left equity valuations looking stretched. The median US stock now trades at a higher P/E ratio than even at the 2000 peak. The Shiller P/E ratio stands at 27 but would be 37 if profit margins over the preceding ten years had been what they were in the 1990s. The fact that interest rates are low gives stocks some support, but with the Fed likely to hike rates in December, that tailwind will begin to fade.
Lackluster earnings growth remains another concern. S&P 500 and economy-wide profit margins have rolled over. Granted, the collapse in profits in the energy sector has been the major culprit, and this headwind should wane if oil prices edge higher over the next 12 months, as we expect. Nevertheless, faster wage growth and a firm US dollar will limit any recovery in margins. A Trump victory could also trigger a trade war, while a Clinton triumph could mean higher taxes and increased regulatory burdens. Both will be headwinds for the corporate sector.
Bottom Line: Our Global Investment Strategy service believes global equities are vulnerable to a near-term correction.
