Brown adds: “The macro backdrop suggests that earnings expectations – the most important determinant of returns over the tactical investment horizon – will continue to rise. And risk appetite, while improved, has not risen to extreme levels.
"We acknowledge, of course, that elevated multiples on global equities may limit the speed or magnitude of any future rally and make stocks more susceptible to unforeseen shocks."
Brown says he believes many equity markets will join those of Germany and the US in hitting record highs soon due to, in his view, the medium-term growth outlook for the global economy being the most promising it has been for many years.
Brown’s view is that corporate earnings will therefore improve and justify the valuation multiples.
Putting some context around that, Rupert Thompson, chief economist at Iboss, says: “[Recent] gains in US equities were once again led by the tech sector. This time, the good performance was sparked by good results from Arm, the UK chip designer. Its shares ended the week up 60 per cent and helped drive a 9 gain in Nvidia.
"Overall, partly on the back of strong numbers from most of the magnificent seven tech stocks but also the unexpected strength of the economy, corporate earnings in the US are once again beating expectations.
"With around 65 per cent of companies now reported, the expectation is for S&P 500 earnings to be up a healthy 9 per cent than a year earlier."
Bargain hunting?
While both the US economy and stock market have soared ahead of peers so far in 2024, Tyndall's Sullivan does not believe that the slower growth in the rest of the world makes equities outside of the US particularly cheap.
However he says the merit of investing in markets outside of the US is that the types of stocks on offer in the rest of the world are different to those in the US market and so offer diversification.
Sullivan adds that in valuation terms, the FTSE is one market that may be regarded as cheap.
Data from Confluence shows that in 2024 so far, the stocks driving returns in the UK market are those which pay a yield, while in the US, it is the stocks that have growth characteristics that have been the primary driver of returns.
Jane says that liquidity has become much more significant in markets in recent years, with central bank quantitative easing programmes boosting liquidity, thereby pushing up share prices, almost regardless of valuation levels.
Thus it may be that the pace, scale and extent of the unwinding of QE in different markets in the coming years has a much greater impact on equity performance than do present day valuation levels transposed onto future economic conditions.
