He believes the profits recession of the last year, triggered by falling oil prices and a surging U.S. dollar, is coming to an end. By next year’s first quarter, many companies, particularly energy concerns, will go up against very friendly year-over-year comparisons.
Eddie Perkin, the head of U.S. equities at Eaton-Vance, agreed with Bernstein, but he said investors need to be more selective at this stage of the bull market. With the S&P 500 at 17 or 18, it isn’t cheap but it’s not in thin-air territory.
Certain sectors, like consumer staples and other low-volatility, dividend-paying stocks, are fully valued at 19 or 20 times earnings. “My point isn’t that stocks are undervalued, but they could go a lot higher,” Perkin said. “Too much money is ready to buy the dip.”
To keep the economic expansion and bull market going, Perkin said capital expenditures “need to pick up.” While it represents a fairly small sector of the economy, the swing factor is often what determines whether growth is dismal or robust.
Asked if the bull market in equities might be borrowing from future returns and moving them forward as many have claimed, Bernstein and Perkin said they weren’t buying into that theory.
What signs would be necessary to see the end of a bull market on the horizon?
Bernstein cited three indicators: widespread euphoria, an aggressive Fed and tremendous overvaluation. Take out a handful of mega-cap tech stocks in 2000 and the S&P 500 sold at about 25 times earnings, while the 10-year Treasury yielded 6.25 percent. Today the 10-year Treasury is 1.75 percent, which would make a 25 P/E multiple less of a stretch. And it’s nowhere near there.