US shares have not peaked yet in their current cycle, according to Citigroup’s chief US equity strategist, who argues that prices will continue to rise well after the Federal Reserve begins lifting interest rates, perhaps as early as next month.
Tobias Levkovich argues that the allure of the S&P 500 index won’t start to dim until the Fed is “three or four” rate hikes into its tightening cycle, towards the end of next year.
This, combined with uncertainty around the US Presidential election and the impact on profit margins of built-up wage pressures, would be enough to put a cap on what has already been a six-and-a-half-year bull market.
Even then, he said, history had shown that stock markets don’t peak until two years after the first increase of a monetary tightening cycle.
The benchmark index has more than tripled since March 2009, to just under 2099 now, with investors’ search for yield, added to an investment boom in oil and gas, a housing market bounceback, technology-related productivity gains and a broader recovery underpinning companies’ performance.
Mr Levkovich sees the index reaching 2200 by the end of this year and 2300 at the peak.
“Most of our data is still supportive of markets moving higher,” he said during a lightning visit to Sydney on Monday.
“We actually expect the market to pull back a bit in the second half of next year.”
He said although equity valuations, calculated according to seven metrics, are currently “above average, they’re not crazily above average”.
“I think it’s fair to say the market isn’t cheap, but I don’t particularly like the words ‘cheap’ or ‘expensive’,” he said.
“Once you say something is ‘cheap’ or ‘expensive’, you open yourself up to confirmation bias.
“Anything you hear that confirms your view you’ll accept readily; anything that is not consistent with your view, you’ll try to reject,” he said.
Mr Levkovich said current market exuberance was also justified by the availability and quality of credit to business.
This indicator pointed to capital expenditure and earnings growth for the next 12 months, he said, making stocks in capital goods, banks, equipment, and software particularly attractive at the moment.
By sector, Citi recommends an overweight position in financials, information technology, industrials and energy, and an underweight holding in consumer discretionary, consumer staples and health care.
CMC chief market analyst Ric Spooner on Monday agreed that although Fed signalling created the “potential for a pause or pullback”, the US stock market had proved “resilient in the face of mounting prospects for a Fed rate hike”.
“Perhaps the major theme for US markets in recent weeks is that support for cyclical sectors like materials, info tech, consumer discretionary and industrials has strongly outweighed selling of defensive sectors like utilities,” he said.
Citi, meanwhile, is sticking to its view that the long-awaited Fed lift-off will be in March, although it agrees recent data has strengthened the case for a December move.
In any case, says Mr Levkovich, the initial tightening moves shouldn’t disrupt US equities too much.
“The first Fed rate hike is basically just the Fed firming or confirming the economy’s sustainable economic development,” he said.
“Once you get to the third or fourth rate hike, then you get a bit of pressure.
“That, we think, is more likely in late-2016,” he said.