6 reasons to be bullish
4. Relative valuations could push up equity returns
Valuations are in a fair-value range (not cheap) on many absolute measures. If one assumes that macro forces will result in below-average earnings growth (as we do in our base-case scenario), stocks look around 20% overvalued. However, if economic growth gradually improves, tail-risk fears subside, and as time further distances investors from the financial crisis, investors could find stocks far more appealing than bonds or cash. Cash yields nothing (and has a negative return after inflation) and is likely to continue to be the case for some time given Fed policy. Bond yields are also painfully low and everyone knows that at some point there will be a rise in interest rates that will result in lower bond prices. This point may be far down the road, but, in the meantime, investors are increasingly aware of the longer-term risk in holding bonds, and they are paid very little to take that risk. In terms of the relative yield, stocks have not looked this attractive compared to bonds for decades. If time continues to pass without a crisis, and moderate economic gains allow earnings to make steady progress, stocks could benefit from the mountain of cash allocated to bonds in recent years starting to be reallocated back into the stock market.