Following three years of double digit growth for US equities, investors are feeling bullish that the positive trend will only continue in 2015. How will the US market perform in the New Year?
The combination of a solid, growing US economy, a low Fed interest rate policy, and high cash reserves on corporate balance sheets, should keep M&A momentum high. Thus, it is reasonable to expect that the S&P 500 will keep booming in 2015. Forecasts have included a high of 2,340 by Canaccord Genuity, an increase of 14%.
Such financial optimism, however, should be questioned with cautionary tales. Whilst the US economy is set to grow between 3-4% in the New Year, investors have already witnessed how the 5 year low oil price impacts upon markets, with the S&P 500 dropping 1.8%.
Jonathan Glionna, of Barclays, provides further reason to remain sceptical about US equities. Their argument is premised on the view that a stronger US dollar will soon tame earnings, whilst a falling Euro will support stronger European exports. The validity of this claim depends very much on whether the ECB is successful in combating deflation with quantitative easing at its discretion, and whether doing so will reassure investors that Europe is a safe and valuable investment.
US central banking policy is another key factor that will affect the growth of equities in this region. The impending prospect of a rise in interest rates near April or in the summer may result in rising levels of price volatility as the market adjusts to the new financial conditions. Higher than expected valuations from 2014 may serve as an additional source that exacerbates the incentive to invest heavily in equities, as doing so becomes ever more expensive.
A stronger US economy and dollar and weaker oil price will undoubtedly affect the appetite for investment in the United States. However, whether the impact will be a net positive on earnings per share depends crucially on what is happening in the rest of the world, notable Europe and Asia, and how the market responds to the Fed’s likely action of normalising monetary policy.