US share market headed for a multi-year bull run: Fidelity

The US equity market is poised to rise in coming years and the S&P 500 Index could reach 2,300 from just under 1,900 now, says Dominic Rossi, the Chief Investment Officer, Equities, at Fidelity.

Amid the challenges facing the world and the US economy, equity investors are not fully recognising how rapidly the US economy is strengthening in many areas and that government finances are improving, Mr Rossi says.

“US economic growth is going to surprise on the upside and we will be discussing 3%-plus growth again,” he says. “The speed of the improvement in the US federal budget deficit is remarkable. Since 2009, the fiscal deficit has shrunk to around US$600 billion (A$640 billion) from US$1.5 trillion. It is not implausible that President Barack Obama will finish his term with a fiscal surplus.

“In which case, we are looking at a US equity market that is similar to the late 1990s (when we had the Clinton fiscal surplus), where equities should be well supported by liquidity.”

It is prudent to consider the standard counter-argument to the buy case for the US, which has lately become commonplace, Mr Rossi says. This argument points out that the US is on a price-earnings ratio of 16 times yet corporate profitability is at record highs. And if we cyclically adjust for peak profits, then the price-earnings ratio is 22 times.

“Profit margins may well be at record highs, but they can move higher,” Mr Rossi says. “The distribution of profits between capital and labour in the US is going through a fundamental shift. It’s hard to see why margins need to mean revert; for this to happen, labour’s share of profits would have to move higher. Unless we go back to highly unionised workforces, which is unlikely, profits are going to remain at high levels.

“If labour’s share of profits were to fall further, we could expect to see some political pressure. Overall, however, the outlook for corporate earnings remains favourable. Combined with healthy liquidity, these two drivers should sustain a multi-year bull market in US equities,” Mr Rossi says. “I believe the S&P 500 could move to 2,000 to 2,300 from its current level.”

The S&P 500 Index finished at 1,896.65 on May 12.