S&P 500 Index: Three reasons to expect small gains over the next few years – CE

Global stock markets have been on something of a tear lately. The S&P 500 has gained another 6% in April, placing it slightly above the 4,200 level. It might be tempting to think that stock markets could continue to rally along with them but economists at Capital Economics think returns over the next few years are likely to prove more tepid, for three key reasons.

Stock markets to see smaller gains over the next few years

“We suspect that the boost from valuations has now run its course. The real yields of long-dated safe assets have risen since the start of this year, and we expect them to resume their earlier upward trend. Meanwhile, credit spreads have levelled off around their pre-pandemic levels, and look unlikely to narrow much further. This suggests to us that further gains in stock markets will have to be driven by earnings growth, rather than by multiple expansion.”

“We think a lot of optimism about those earnings looks already baked into stock prices. After all, the consensus analyst forecast for full-year earnings in 2022 is almost 30% higher than actual earnings were in 2019. This suggests to us that there is limited scope for further earnings surprises to support the stock market over the next year, notwithstanding our very positive forecasts for the US and global economies. Indeed, the very rapid profit growth on display in the current US reporting season appears not to have boosted the overall stock market by all that much.”

“We think various shifts in economic policy have the potential to slow listed companies’ earnings growth. The prospect of higher corporate taxes in the US is a clear candidate. And the increasing focus of regulators on anti-trust issues, both in the US and elsewhere, is another.”