Opinions about the attractiveness of US equity markets vary considerably. There is particular uncertainty about whether unconventional monetary policy has made the markets seem more appealing than they really are.
C.T. Fitzpatrick (AL, '09), CEO of Vulcan Value Partners, an asset manager based in Birmingham, Alabama, says loose monetary policy has had a significant impact. “Valuation metrics show the US equity markets are pretty overvalued but there is a view that valuation levels need to be adjusted for the historically low interest rates,” he says.
That would certainly support the stance of Connor Browne, a portfolio manager at Thornburg Investment Management, based in Santa Fe, New Mexico. “Overall we don’t think the US market looks too expensive to us,” he says. “The S&P 500 is trading at 15 times next year’s and 18 times this year’s earnings. Not low, but not crazy.” The Boston Company portfolio strategist, Michael Arends, agrees. “Taking earnings on a five-year or 10-year rolling basis, the S&P 500 is broadly in line with long-term averages but there are pockets of excess,” he says.
Fitzpatrick and other bears argue that record-low interest rates make US markets appear more overvalued than they are. “If you adjust discount rates for today’s levels, you might say markets are at fair value and you may even say they are slightly cheap. We don’t accept that. We take a very long view and we are using longer-term averages as inputs for our discount rates, which means we are not using the current levels of interest rates and we don’t think inflation is going to be as low as it currently is forever,” Fitzpatrick says.