What a Difference a Year Makes
Equity returns surprised throughout 2019. For the fourth quarter, domestic equities advanced 9.1%, while foreign equities rose 8.9%, an obvious difference from the prior year.
Recall our fourth quarter 2018 Investment Insight where we posited for 2019 that equities “offer[ed] opportunity, albeit within an environment of perceived higher volatility.” That said, the calendar year performance of 31.0% and 21.5%, respectively, for domestic and foreign equities exceeded expectations.
The Stage Is Set – or Is It?
Somewhat surprising is the sentiment of strategists, who waver between divergent outlooks. On one hand, strategists may be reluctant to project a bullish outlook given the returns realized during the last decade coupled with a concern for a seemingly overdue correction. And who would blame them, given the duration of the current bull market at 129 months – the longest in history – versus a historical average duration of 54 months?
Then you have strategists who appear confident this current uptrend will continue, albeit with expectations for muted equity returns during 2020. Their rationale includes expectations for slow growth within the United States coupled with the semblance of an upturn in economic regions outside the United States, given continued quantitative easing.
Within the United States, the economy continues to grow, albeit slowly. While earnings growth abated during 2019, corporations continue to be profitable. According to Refinitiv, analysts estimate earnings for 2019 to contract 0.2% year-over-year. While this may give pause to equity investors, note corporations reported earnings that exceeded analyst’s estimates for each of the first three quarters of 2019.
Going forward, analysts project positive earnings growth of 9.7% for 2020. As we approach reporting dates, we anticipate revisions by analysts to their quarterly and annual estimates. Recent trends in revisions have been less negative.
Outside the United States, a similar story emerges where analysts anticipate a modest decline of 1.6% in year-over-year earnings growth for 2019, followed by an increase of 6.6% in year-over-year earnings growth for all of 2020.
Valuation, as measured by the Price-to-Earnings (P/E) ratio, continues to be a focal point. The forward P/E for the MSCI USA Index, a broad measure of tradeable float in the United States, is 18.7x estimated earnings versus its historical average of 18.8x. For foreign equities, the forward P/E for the MSCI All-Country World ex USA Index, a broad measure of investable markets outside the United States, is 14.2x versus its historical average of 15.7x.
We remain confident equities offer opportunity. That said, given the divergence of expectations, including other macro-level events (e.g., the upcoming election), we anticipate somewhat higher volatility given uncertainties within both domestic and foreign markets.
We believe our continuously executed disciplined process provides an opportunity for success, specifically within the framework we see going forward. We continue to favor domestic equities over foreign while favoring domestic large cap over small cap. While the forward valuation of domestic large caps may appear fully valued relative to other equity asset classes, we believe investors will continue to focus on this segment given the liquidity associated to domestic large caps.
Source: BTC Capital Management, Bloomberg LP, Ibbotson Associates, FactSet.
The information provided has been obtained from sources deemed reliable, but BTC Capital Management and its affiliates cannot guarantee accuracy. Past performance is not a guarantee of future returns. Performance over periods exceeding 12 months has been annualized.
The information within this document is for information purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. Statements in this report are based on the views of BTC Capital Management and on information available at the time this report was prepared. Rates are subject to change based on market and/or other conditions without notice. This commentary contains no investment recommendations and you should not interpret the statement in this report as investment, tax, legal, and/or financial planning advice. All investments involved risk, including the possible loss of principal. Investments are not FDIC insured and may lose value.