Tags: stocks | Subramanian | BofA | valuation | SPY

BofA: Stocks Are Expensive but Offer Best Outlook for Gains

By    |   Wednesday, 27 May 2015 10:30 AM

Stocks look expensive by historical measures of value but they still offer the possibility for the best long-term gains among investment choices, according to Bank of America Merrill Lynch.

The bank found that valuation metrics, such as the price-to-earnings ratio that measures a company’s share price in relation to its profits, are poor indicators of market returns for any period less than three to four years.

“If valuation is your sole justification for a bullish or bearish stance in a given year, be prepared for a wide variety of outcomes,” Savita Subramanian, head equity and quant strategist at BofA, said. “Valuations are a great long-term predictor of returns, but a terrible short-term market timer.”

The S&P 500 stock index has climbed about fourfold since hitting a bottom in March 2009 as the U.S. economy suffered its worst recession in 80 years. The index’s trailing 12-month PE ratio is now about 17.6 times, higher than the long-term average of 16 times, which may indicate future gains will be modest.

“We are now more than six years into this bull market, and while we do not see any signs that its end is imminent, it is probably not a stretch to assume we are closer to the end than to the beginning,” Subramanian said in a May 26 report obtained by Newsmax Finance. “Worse yet, historical levels are upwardly biased by the lofty valuation levels seen during the tech bubble.”

Current valuations suggest that stocks will have a median annual return of 8 percent in the next 10 years, compared with the 50-year average total return of 10 percent. But other investment categories have their own risks, according to BofA:

  • Bonds: “Given how low interest rates are today — whether you are looking at real or nominal, long-term or short-term, or current or normalized — relative to bonds, stocks appear to offer much better returns.
  • Cash: “Current returns on cash and cash equivalents are close to zero. Although those returns will increase as interest rates rise, the long-term outlook for short-term interest rates appears quite modest as the Fed attempts to normalize rates without causing the economy to falter.
  • Commodities: “Our commodity team expects annualized commodity returns over the next decade to be below the 8 percent long-term average. A range of 3 percent to 7 percent seems more reasonable in their view.
  • Real Estate: “BofA home price forecasts imply low single-digit appreciation over the next few years and our economists expect similar growth over longer term horizons as well.”

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Stocks look expensive by historical measures of value but they still offer the possibility for the best long-term gains among investment choices, according to Bank of America Merrill Lynch.
stocks, Subramanian, BofA, valuation, SPY
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2015-30-27
Wednesday, 27 May 2015 10:30 AM
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