Summary
- Volatility set to continue into first few months of 2012, but increasingly accommodative monetary policy globally could see a reacceleration of growth for U.S. export-driven companies later.
- Energy and health care sectors stand out as likely outperformers.
We are cautiously optimistic on U.S. equities as we enter 2012. Despite the negative headwinds generated earlier in 2011 by Middle East driven oil price spikes, the tsunami in Japan and the ongoing turmoil in Europe, the U.S. economy proved relatively resilient during the year as corporate profits showed continued strength, retail sales remained remarkably robust, and monetary policy was highly accommodative.
Heading into 2012, we expect GDP to range between 1% and 2% as consumer spending is likely to slow from unsustainably high levels without a significant uptick in hiring. S&P 500 earnings growth is also likely to moderate as Europe represents close to 20% of S&P 500 companies' sales, and will likely serve as a drag on company results. Volatility is likely to remain elevated for at least the first several months of the year given the uncertainties surrounding the global economy as well as what is likely to be a very tight presidential election in November. Still, we are hopeful that increasingly loose monetary policy across the globe can result in a reacceleration of growth for export-driven companies in the U.S. by the second half of the year.
Valuations for U.S. equities are quite compressed with the S&P 500 trading at less than 12 times current year earnings per share. Thus, any resolution of global growth concerns and/or clarity on post-election policy in the U.S. could result in a significant re-rating of U.S. equities toward the year end, even in the face of decelerating profit growth. At current valuation levels, we are finding many attractive opportunities in a number of stocks and sectors. Given the current macroeconomic backdrop, energy and health care stand out as likely outperformers in 2012.
Risks to our outlook primarily stem from potential contagion effects from the European sovereign debt crisis, which has already resulted in tightening credit conditions in the U.S. If credit conditions do not improve in the coming months, corporate profitability would likely to be negatively impacted and unemployment trend higher. While this would ultimately result in another round of quantitative easing from the Fed, equity prices would come under pressure until the impact of such monetary policy changes came into effect.
Share