Having enjoyed an unbridled upward trajectory for the past five years, the US has given investors and economists alike almost everything they could hope for – with the exception of enough earnings growth.
While he is bearish regarding the continuation of US economic growth, Coombs, Rathbones’ head of multi-asset, remains relatively optimistic on earnings potential.
“There is some worrying data in the States, and it is quite likely that we will see an economic slowdown in the next three months,” he said.
“US valuations are definitely not cheap, but consensus forecasts for US earnings are pretty modest for the next two years and there is the potential for upwards surprises there.”
Coombs’ views are echoed by Nadia Grant, US equity fund manager at Threadneedle Investments, who outlined why she is positive on the earnings front.
“Low inflation means the rate at which equity cash-flow is discounted is also low and historically this has been very supportive for the market,” she explained. “Economic fundamentals and earnings growth should underpin expectations for 2015.
“We are forecasting 3% GDP growth, which translates into low to mid-single digit revenue growth, some profit margin expansion and buybacks of around 1%. Thus, we anticipate mid to high single-digit earnings growth in 2015, which is attractive by historic standards.”
Coombs ruled out any multiple expansion, but, while admitting that he is at a loss to explain high stock valuations, reiterated his belief that there are enough drivers to merit an earnings push.
He said: “What niggles is that the interest rates are stubbornly low around the world but money is still finding its way into equity markets and pushing valuations higher. I can’t rationalise that – it is just a wall of money. But I do think there is potential for earnings surprises in the States.
“One driver could be a reduction in corporation taxes. Also, cheaper commodity prices are feeding into the real economy.”
This belief is reflected in Coombs’ medium-risk equities portfolio, where he currently holds a 17% balance to the US, the second-largest weighting behind the 18% he has dedicated to the UK.
