The bullish sentiment around US equities remains strong with investors expecting the S&P 500 to reach new heights. But will their enthusiasm be dampened by a weakening outlook for returns?
With earnings season underway, investors have been buoyed by most of the 70 companies that reported in the first week posting better-than-expected results and more than 100 companies due to report this week including Tesla (Wednesday) and Amazon (Thursday).
These Magnificent Seven results – with the others due over the coming weeks - are important given the dominant role of big tech in driving the index higher and the latest Bloomberg Markets Live Pulse survey shows that 75% of respondents expect outperformance or performance in line with the rest of the market this quarter. The Magnificent Seven started October down 0.9%.
“The catch-up in the Magnificent Seven after a lackluster quarter is a compelling trade to look at right now,” Anastasia Amoroso, chief investment strategist at iCapital told Bloomberg.
Another important result, due next month, is Nvidia with 45% of survey respondents expecting the chipmaker’s role in the AI revolution to boost the stock, while investors are also eying positive news from the financials sector with lower interest rates favoring the sector.
The survey also shows that, even with the risk associated with the presidential election, the S&P 500 is expected to reach 6,000 by the time the year ends with most respondents expecting a boost from earnings season and this key period for Corporate America is considered more critical for the market than the election result.
“I know the election brings a lot of emotion depending on whether one’s candidate wins or not, but don’t let that come into your portfolio,” Brian Spinelli, co-chief investment officer at wealth advisory firm Halbert Hargrove told Bloomberg.
However, before investors get too excited, Goldman Sachs strategists are warning of lacklustre returns over the next decade, claiming in a client note that the era of big gains for the S&P 500 is over. During the next decade they see the index posting an annualized nominal total return of just 3%, way below the 13% of the past 10 years and the 11% long-term average.
“Investors should be prepared for equity returns during the next decade that are toward the lower end of their typical performance distribution,” the strategists wrote, adding that they see a 72% chance of equities lagging Treasury bonds for performance and trailing inflation.
Even if the dominance of big tech was to endure – the strategists expect a broadening out of returns – they estimate that average returns would still be below average at 7%.
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