U.S. equities have generally delivered strong returns in recent years. 2024 was no exception, with both earnings growth and price/earnings ratios exceeding expectations. The key question for investors is, “What happens next?”
In our view, U.S. valuations are elevated but not as stretched as traditional metrics imply. Despite higher interest rates, many large corporations insulated themselves from tighter monetary policy by locking in low financing costs ahead of time. And more importantly, the market has been increasingly concentrated toward growth-oriented sectors, such as technology, that support higher valuations.
Nevertheless, the likelihood that we are in the midst of a valuation-supporting productivity boom, akin to the mid-1990s, must be balanced with the possibility that the current environment may be more analogous to 1999. In the latter scenario, a negative economic development could expose the…
