Bull vs. Bear: Will even U.S. stocks run out of steam?

Scott Barlow : The S&P 500 is not cheap. Based on the trailing price earnings ratio of 17.8 times, the U.S equity market remains at the high end of its historic range. Perhaps more importantly, revenue growth has been sluggish for years and company profits have been driven by extremely cheap interest rates in the corporate bond market. The funds raised were used to refinance exisiting debt at higher rates, and for share buybacks.

Financing to buy back more shares is growing increasingly expensive, however, which should reduce share repurchases.

Global growth. Consensus global economic growth expectations for 2015 have been slashed from 3.13 per cent in May of 2014 to 2.76 per cent according to Bloomberg data. The U.S. economy is expected to grow at a healthier 3.0 per cent. U.S. economic outperformance depends on a repeat performance of the 1990s when the U.S. was able to maintain growth while the global economy remained sluggish. However, about 40 per cent of revenue for the S&P 500 now comes from outside the country. And global economies are far more interconnected than ever before.

America relies on energy jobs, too. According to Energy Information Agency data from 2008 to 2013 (last available), the vast majority of new U.S. jobs were created by the oil and gas industry. Ex-energy, employment levels were flat between 2008 and 2013.

Demographics and secular stagnation. The U.S. demographic outlook (in terms of percent of the population in low-spending retirement years) is much better than Japan’s was in 1990. Still, as the Baby Boomers retire, the low interest rates, corporate cash hoarding and low consumer demand that characterized Japan’s lost decade are increasingly evident in the U.S. economy and markets.

The risk of secular stagnation – a multi-year period of very slow economic growth – are clearly highlighted in a recent column by Harvard economist and former Treasury Secretary Lawrence Summers,

“The danger which I think is very real is that the zero lower bound on nominal rates will prevent the attainment of full employment as desired investment falls short of desired saving… as the experience of the U.S. economy in the 1930s demonstrates, even with rapid innovation it is possible for economic performance to be very poor when finances are not successfully managed. Recent good news about the state of the U.S. economy should not blind us to this reality.”

Luke Kawa : Mercifully, this is the easier case. History is on my side: stocks usually go up.

If American equities don’t advance this year, I’ll be even more bullish on their odds of advancing in 2016 – either that, or the United States will be in a recession. But now, for happy thoughts…

The eagle is soaring. To put it kindly, Wednesday’s U.S. retail sales figures left something to be desired. But even in that malaise, there’s reason to be optimistic. Food service sales were up 8.2 per cent year-over-year, and the pace of the annual increase accelerated relative to November. Gluskin + Sheff’s David Rosenberg has often cited the willingness to eat out as a key leading indicator of the health of the U.S. consumer.

Besides, parsing the details of one report causes one to lose sight of the forest from the trees. Payroll growth was stellar in 2014 and the American economy expanded by 5 per cent in the third quarter of 2013. Buoyed by robust payroll growth and tumbling oil, overall disposable income is undoubtedly rising at a faster clip than average wage growth would suggest. Equities don’t always move in the same direction as the economy, but an improving economy is certainly a better backdrop for stocks than the alternative. And if the “secular stagnation” thesis is indeed true, the United States will be the last developed economy to suffer this fate, thanks to its more favourable demographics. To be sure, this isn’t a 2015 story for America.

Equities aren’t expensive. The S&P 500’s trailing price-to-earnings ratio is below but close to its 25-year average – suggesting that equities are neither cheap nor expensive. Moreover, in an era of abnormally-low interest rates, it’s reasonable to expect that equity valuations would exceed what we’d consider to be normal levels – that low returns in fixed income push investors into riskier asset classes. This dynamic should keep multiples from slipping too far. And in the short-term, pessimism on the outlook for U.S. earnings, with analyst’s estimates ratcheting downwards, is a useful contrarian signal. During earnings seasons over the course of this bull market, the S&P 500 has moved in the opposite direction of analysts’ earnings revisions in 17 out of 23 quarters, according to Bespoke Investment Group.

Contagion from the energy complex is limited. Corporate bond yields are rising, but the softness in this segment can be traced back to energy companies, whose share of total issuance (particularly in the high-yield space) has increased markedly thanks to the U.S. shale boom. The ability of non-energy companies to engage in debt-fuelled stock buybacks, which have played a large role in fuelling earnings growth, does not look to be meaningfully impaired.

If not the U.S., then where else? If the U.S. economy can’t reach escape velocity this year and serve as the engine of global growth, then it’s very difficult to highlight other locales that are poised to accelerate. This fact should make cause traders more forgiving of blips in the American growth story (though that’s not what we saw early this morning!) and perpetuate the “buy the dips” strategy that’s been proved to be immensely profitable. In 2015, the United States will have to do a lot to prove that it doesn’t deserve the title of “engine of global economic growth.”