The extraordinary performance of equities since the depths of the recession has caused manyinvestors to question the time left in this bull market.
• Corporate fundamentals, including record high prots and historically low leverage, point to a
healthy corporate landscape.
• Although equity valuations have approached long-term averages, stocks are not expensive andcontinue to be a more attractive option than high-grade xed income.• Real earnings yields are approaching long-term averages, but equity markets do not stop ataverage.
US equities: Pendulums don’t stop mid-swing
It’s all about the fundamentals
Many investors have watched the S&P 500 surpass previous peaks in 2013, with year-to-dateperformance exceeding 19%. As shown on page 41 of the
Guide to the Markets - Asia
, whilereturns have been impressive, what may have gone unnoticed are improving fundamentals of US
• Corporate fundamentals remain in excellent condition, with a historical high in rst quarter earningsper share and record lows in nancial leverage.• Estimates from Standard & Poor’s with 99% of companies reported indicate a second consecutiverecord high in earnings per share for the second quarter of 2013. This would indicate US companieshave never been more protable in the history of the S&P 500 than the rst two quarters of this
• Elevated prot margins have helped earnings growth enormously over the past few years. However,revenue growth consistent with modest global GDP growth and the potential for additional leverageon corporate balance sheets make a bullish case for long-term investors in US equities.
While margins havecontributed to earnings growth, revenue growthshould take the reins going forward.
The S&P 500 is the most profitable it has ever beenin its history.
Companies have room to take on additional leverage,which could boost returns.
United States: Source of Earnings, Corporate Profits and Leverage
Margin Share of EPS GrowthRevenue Share of EPS Growth
S&P 500 Year-over-Year EPS Growth
Growth broken into revenue growth and margin expansion, quarterly
Adjusted After-Tax Corporate Profits (% of GDP)Total Leverage
E q u i t i e s
Includes inventory and capital consumption adjustments
S&P 500, ratio of total debt to total equity, quarterly