Looking ahead, we expect overall EPS growth to turn positive late this year or early in 2017 as the energy drag wanes. The still-sluggish economic environment, however, means that earnings will likely continue to struggle and remain uneven.
Equity Prices Should Grind Unevenly Higher
We remain mildly risk-on in our investment positioning, and expect equities and other risk assets to move higher over the next 12 months. A December Fed rate hike could spark some volatility, but shouldn’t derail the bull market as the Fed plans to proceed cautiously.
Central bank policy outside of the United States also bears watching. The Fed is the lone major central bank that is starting to shift to a tighter stance. Other global central banks remain firmly in easing mode, which should act as a partial anchor on Treasury yields. We think yields will likely rise as economic growth improves and as policy slowly starts to shift, but any advance should be gradual and not enough to act as a headwind for risk assets.
We understand investors’ desire to be cautious, given uneven economic growth and a host of geopolitical issues. We also acknowledge that equity prices are not as cheap as in recent years, making some investors reluctant to enter the markets. At the same time, we think equities look more attractive than bonds (particularly government bonds offering yields near historic lows) and cash, which is still offering close to 0% returns.
As the bull market matures, selectivity is growing in importance, suggesting this remains a
stock-picker’s market and one that we believe will favor active management. In our view, there are a number of different elements investors should consider when building equity portfolios. First, they should focus on the sustainability (and, perhaps more important, growth potential) of dividends. We expect more dividend increases in the future, if and when earnings become more stable. More broadly, we also favor domestically sourced earnings, cyclicals over defensives, dividend growth over dividend yield, and companies generating unit growth and solid levels of free cash flow.
1 Source: BCA Research
Bob Doll is chief equity strategist at Nuveen Asset Management.