Monday, October 20, 2014

Roubini predicts 5 percent upside to stocks

I would say U.S. stock prices have risen significantly since the global financial crisis. Earnings growth is slowing down. Even top line revenues are somehow slowing down. P/E ratios are slightly above historical averages if you take Shiller’s CAPE. [In other sectors] they’re meaningfully above historical averages, and in some sub-sectors—like tech, biotech, social media—they have P/E ratios that just don’t make any sense.

So, there are three forces that are going to be driving the U.S. Stock Market ahead. Some acceleration of growth should be positive for earnings. Some slowdown in earnings in top line and bottom line because they cannot keep on growing much faster than GDP forever. And the global factors might imply that the components of earnings of S&P that come from the rest of the world are going to disappoint. And three, however slowly short and long rates might go higher, that would be a headwind to U.S. equities. 

So, the net of it would be, say, next year U.S. equities going up maybe by 5%, not more than that. So still positive returns, but not the kind of returns we have seen in the last couple of years. That will be our baseline on U.S. equities.