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US Equities: Valuations at the Mercy of 1Q15 Earnings



Higher equity valuations

US equities are currently trading at 15.6x on a one-year forward earnings basis. The valuations increased by 1.6% in early April due to the advance in the index. Equities moved up to within three-quarters of their historical valuation range—mainly backed by strong corporate performance. The current earnings season will heavily influence the direction that equity valuations take across sectors.

US equities (SPX) are trading at a premium on a one-year forward earnings basis, when compared to European equities (EFA) and emerging markets (EEM).

Wall Street analysts expect a difficult earnings quarter. Markets priced this consideration into current valuations. If the earnings season turns out to be in line with or slightly better than expectations, the index will see upward revisions.

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Consolidation at current levels

Investors are getting mixed signals in the form of real estate, manufacturing, and jobs data. An increase in interest rates during the current fiscal is also expected as a result of the decent growth we’ve seen in the US. The undervalued and growing global economies will also affect US equity valuations.

Active as well as passive asset managers including BlackRock (BLK), State Street (STT), Franklin Resources (BEN), T. Rowe Price (TROW), Morgan Stanley (MS), and Berkshire Hathaway (BRK.B) have watched their own valuations grown in tandem with the overall index.

Mutual fund players such as T. Rowe Price Group and Vanguard are also benefiting from the upward trend in US equities.


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