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US Equities Garner Premium Valuations against Global Equities

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Jan. 26 2016, Updated 4:17 p.m. ET

Premium valuations

US equities (SPY) were trading at 15.6x on a one-year forward earnings basis. Valuations rose by 2.2% during the week ended January 22, 2016. Valuations were revised mainly due to short covering in US equities and buying on lower valuations.

The US consumer price index fell by 0.1% in December 2015. Overall in 2015, prices rose by 0.7%, according to the U.S. Department of Labor. Excluding food and energy, inflation stood at 0.1% in December. Lower inflation can push the Fed to raise interest rates at a faster pace. However, the slowing economy is making a case for lower interest rates.

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Investors are deploying a global top-down approach in order to generate higher returns. Valuations improved over the past couple of quarters on housing and auto sales data, consumer spending, and lower inflation. Slowing growth across major emerging markets and commodity-driven nations also led to higher investments domestically as well as in the Eurozone.

Investment considerations

The Federal Reserve is expected to hike interest rates slowly in 2016 against a backdrop of major factors such as the unemployment rate, growth of the global economy, and the valuation of the dollar.

Alternative asset managers such as Blackstone (BX), KKR (KKR), and Apollo Global Management (APO) saw their profits revive in 4Q15. These companies may offer attractive alternative options to investors who want higher returns amid low interest rates.

Valuations have currently priced-in the outperformance of US equities against European (EFA) and Asian equities (EEM). However, with competitive quantitative easing due to slowdowns in China, Japan, and commodity-exporting nations such as Brazil and Russia, investors are looking for investments in safer assets. As a result, investments continue to support asset prices in the United States and Europe.

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