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2,000 reasons to sell US equities?

2,000 reasons to sell US equities?

Last night history was made with the S&P 500 closing above 2,000 for the first time.

With the index is now almost 200% higher than its post-crisis low of 676.5 in March 2009, how much leg room is left further rises?

The most recently rally has been fuelled by Federal Reserve chair Janet Yellen's comments at Jackson Hole, giving rise to expectations that the central bank will raise interest rates at a slow pace.

Data coming out the US yesterday added to the feelgood sentiment, with durable good orders jumping by a massive 22.6% in July, well above the 7.5% forecasted.

Additionally, signs the European Central Bank is on the verge of yielding and unleashing further QE has driven investors into risk assets.

But Capital Economics does not feel there will be significant gains in the S&P 500 from here, expecting the index to end next year 'roughly' where it is trading now.

Chief economist John Higgins believes the Federal Reserve will raise interest rates a 'little more aggressively than generally  anticipated' and expects the first rate hike in the next cycle to land in six months' time.

However, Higgins said history suggests this will not necessarily translate into a major correction in the stockmarket.

'The market has tended to shrug off both the prospect, and the onset, of higher interest rates in the past,' he said.

'The S&P 500 rose by an average of nearly 5% in the six months before the first rate hike in each of the last seven major tightening cycles. [And] it also gained an average of about 5% in the nine months after the first hike.'

Fidelity Worldwide Investment chief investment officer Dominic Rossi (pictured) is more bullish.

'Despite the strong recovery of the past few years and the S&P 500 reaching the key 2,000 landmark, I remain bullish on the outlook for US equities and feel the strength and duration of the resurgence will surprise many investors,' Rossi said.  

'Equity market volatility remains anchored and the outlook for the US economy is supported by a number of positive structural factors, including the shale boom and the improving budgetary position.

'The earnings outlook also remains favourable and I think that those analysts that are arguing that US profits can’t go higher are very likely to be proved wrong.'

Fidelity American fund manager Peter Kaye (above) added: 'Despite US equities hitting record highs, I do not think that valuations are overextended compared to history.

'As always, it is important to consider the context – we are still in an environment of record low interest rates and the US earnings outlook is both robust and improving.

'Moreover, the broader US economy is supported by a number of structural factors such as the shale boom and corporate confidence is at its highest for a long time as evidenced by the marked pick-up in M&A activity.'

Although US equities appear to be at fair value, JPM US Equity Income manager, Citywrie + rated Clare Hart (above), highlights there remains a valuation gap between equities and fixed income.

'If you believe the economic expansion in the US is sustainable, there is justification for maintaining an overall constructive outlook on US equities, Hart said.

'US companies are choosing to boost shareholder returns in the absence of robust revenue growth, which has led to record highs for share buybacks and dividend payments.

She added: 'Greater shareholder return should continue throughout 2014 as interest rates remain low and companies maintain record levels of cash on their balance sheets. Share buybacks allow companies the opportunity to reward shareholders and boost their earnings per share, so we expect to see more of this activity.'

Higgins said quantitative easing has distorted US valuations, with the S&P 500 now more stretched than when it raised rates in previous cycles.

He acknowledges the cyclically-adjusted price/earnings ratio (Cape) of the S&P is nowhere near as high as it was during the tech bubble at the turn of the century, when distortions to earnings and corporate policy are taken into account. 

However, he highlights that it is still one third higher than the long run average once these distortions are eliminated. 'So even if the equilibrium level of the Cape today is a little higher than the long-run average, it is hard to make the case that equities are attractively valued in their own right.'

But Higgins sees no reason to panic.

'Overall, we think Fed tightening is unlikely to deal the stock market a fatal blow. But given its current valuation and the outlook for corporate profits, we suspect it will struggle to make further headway,' he said.  

'What’s more, the volatility of the market is close to multi-year lows, which raises the risk of at least a temporary correction if the US central bank springs any surprise.'   

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