US Equities’ Valuations Rose on Strong Bank Earnings in 2Q15



Higher valuations

US equities (SPY) are trading at 16.1x on a one-year-forward earnings basis. Valuations rose by 2.59% in the week ended July 17, 2015. These were revised because of improvement in the housing market and better-than-expected bank earnings.

The US economy’s fundamentals improved with a fall in unemployment, higher housing starts, and a rise in inflation. Initial jobless claims fell by 15,000 to 281,000 for the week ended 11 July—the nineteenth straight week below 300,000. The US housing market is benefiting from low mortgage rates and labor market strength. The National Association of Home Builders/Wells Fargo sentiment gauge held in July the highest level since November 2005.

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Earnings impact valuations

US equities’ earnings announcements in 2Q15 have given mixed signals. Major banks like JP Morgan (JPM), Bank of America (BAC), and Citigroup (C) beat analyst estimates in 2Q15 and reported strong earnings.

Wells Fargo (WFC) and Goldman Sachs (GS) reported a decline in profits. Non-interest expenses rose 2.3% for Wells Fargo, and reserves set aside to cover bad loans grew 38.2% from a year earlier.

Goldman Sachs’ profits fell mainly due to a decline in fixed income revenues and higher legal costs.

Alternative asset managers like Blackstone (BX), Carlyle Group (CG), and KKR (KKR) are offering attractive alternative investment options to investors seeking higher returns amid these low-interest rates.

Current valuations have priced in the outperformance of US equities against European (EFA) and Asian equities (EEM). However, with the announcement of reforms by major emerging economies and QE (quantitative easing) by the ECB (European Central Bank), investors are betting big on equities outside the US, especially on emerging markets.


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