Correction territory? US markets ‘have 20-30% upside left’
US markets are nowhere near peak territory and could comfortably climb another 30% before the end of the current cycle, Legg Mason affiliate ClearBridge Investments has said.
Having peaked in January, the S&P 500 remains some way off its recent record high following a period of subsequent volatility.
Jeffrey Schulze, investment strategist and director at ClearBridge, said a peak in markets now – and a subsequent downturn – was unlikely, with either interest rates or overall market valuations needing to be significantly higher from here.
“There is a lot of fear now among investors but are we at the beginning of a bigger correction now? No is the simple answer. We need to see a ‘blow off top’ market – where valuations go significantly above expectations – before we reach that stage, and we have not seen that yet,” he said.
“There could therefore be another 20%-30% upside from here for US markets broadly, depending on how the earnings cycle comes through.”
Schulze said a number of drivers remained in place to continue to support equity markets for some time to come, with a secular bull market like the one seen in the 1980s and ‘90s more likely than a correction.
“The biggest buyer of equities – via buybacks – are corporations, and they are still proceeding with those, so that provides a floor for US equities,” he said. “Indeed, the corporate sector has been the biggest buyer of US equities since 2009, and corporations are expected to carry out $700bn of buybacks in 2018.”
Schulze compared the current secular bull market – which started in 2010 – to the 1980s market. During the previous one, the S&P 500 delivered a cumulative return of 1,261%. In comparison, today’s bull market has delivered 136.8%.
Much has been made of elevated price to earnings ratios, but Schulze added these are not a key indicator to watch, with history showing that they do not signal sell-offs effectively.
For example, in June 2007 before the credit crunch, P/E ratios were just 16.3 times, well below previous periods. The S&P 500’s P/E ratio is currently above 20 times, but that too remains below the peak of 23.2 times seen in 2009.