By the fourth quarter of 2015, the pressure on US stock markets from the oil price and the dollar had been there for over a year.
Disappointing corporate earnings and concerns about geopolitical risks and the economic outlook continue to drag down the market.
However, we hold a positive view of the stock market outlook this year from a long-term investment perspective.
The present valuation level reflects that of an extreme situation — nearly 65 percent of the companies in the S&P 500 index have a bear market valuation.
But our fundamental assumption is that the US economy will continue growing while corporate earnings will gradually recover despite macroeconomic headwinds.
Most of the S&P 500 companies have announced their results. We estimate the earnings per share in the fourth quarter will be down 1.8 percent at US$26.27.
While maintaining that corporates will see positive earnings growth this year, we saw worse than expected fourth-quarter earnings which have already affected our earnings estimations for the first quarter of this year.
That said, we expect full-year operational profit to climb 4 percent and the overall profit up by 15 percent.
Actually, if the market had overvalued the influence of dollar appreciation, we may be able to adjust upward our estimations.
Most of the analysts agree that, although the headwinds will exist for a long time, their impacts would gradually decrease.
The appreciation of dollar and the low oil price are the two major factors that lead to low earnings projections for US companies.
These macro uncertainties also result in divergence in earnings outlook in the market.
Under such circumstances, the best way is to watch the earnings outlook excluding energy-related businesses.
If energy businesses are excluded, the estimate says EPS may surge by 6 percent this year.
This means earnings from US companies’ core businesses are strong and investors would realize the returns after the dollar and oil price effects fade away.
The current valuation level has priced in quite a lot of uncertainties, but we don’t see a big chance for them to actually happen. The benefit-risk balance has been turning to the positive side.
In the long term, valuation is more important than price.
We still expect US stocks to rebound and offer reasonable returns in 2016.
This article appeared in the Hong Kong Economic Journal on March 7.
Translation by Myssie You
[Chinese version 中文版]
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