David Kelly, Chief Global Strategist of JPMorgan Asset Management, says there is only one god of the stock market and that is future earnings growth. He believes this year’s strong earnings growth will push the market higher in 2018. The biggest threat he sees to equities is a substantially worse trade conflict. Following is a transcript of the video.
Sara Silverstein: And what’s your outlook for the markets? Do you think that the US stock market is expensive right now?
David Kelly: No, I think the US market is okay. I mean, it’s had a sort of rocky kind of year, and I think the reason for that is people have a hard time appreciating just the earnings we’re receiving right now. The problem is, I think stock market investing is kind of a monotheistic religion; there’s only one god, and that is future earnings growth. And the thing is, you cannot see much future earnings growth from here. Next year it’s going to be tougher than this year. But look how good it’s this year. I mean, this year we think we’re going to do about 26% year-over-year growth in operating earnings per share for the S&P 500. That’s extraordinary in the tenth year of a bull market in equities. And it’s like you’re getting five years’ of earnings growth packed into this year. So I think we should appreciate, and I think investors eventually will appreciate, just how good these earnings are right now, the ability of companies to earn this cash, to distribute this cash, that should push the market up. And I think the market, barring some worse trade conflict, I think the market will probably move up between now and the end of the year.
Silverstein: And that’s my next question. What would it take for the market to dive? Is trade the biggest —
Kelly: I think there is a risk there, if we keep on doubling down on a trade conflict. Remember, people like Xi Jinping, they’re not going to capitulate here, because they are politicians, in a broader sense, in China. They cannot be seen to lose face over this. And they think that — you know, there’s no midterm elections in China. And because of that, they’re not going to give in easy, and so the danger is, the trade war gets prolonged.
Now, honestly, I think we may see sort of a trade war ceasefire before the midterm elections, because I think the pushback on Washington about this trade war is getting bigger and bigger and bigger, and eventually I think that’s going to have an impact on the administration. But there is a risk.
One of the biggest risks facing this economy is that we keep on pushing up tariffs, because tariffs are such a bad idea. It is an idea twice-cursed. It curses the person inflicting the tariffs and it curses the one upon whom the tariffs are inflicted. It’s just going to slow down global growth. It slows down economic growth in the United States, so it is a big risk, but hopefully it’s one that we sort of back away from before the end of the year.
Silverstein: And where else are you seeing opportunities for investors?
Kelly: Well, I think there’s a lot of opportunities in equities overall, particularly outside the United States. And remember, we’re going to slow down eventually to about 2% growth. We don’t have the population growth, we don’t have the workforce growth, honestly, to do more than that. But if you look overseas, Europe’s still got a lot of unemployment, that unemployment rate’s coming down, they can grow faster. Emerging markets, there’s always something going wrong in emerging markets, but overall they’ve got much better long-term growth prospects. And then if you look at valuations, the US is fairly valued, but Europe is cheaper than average, and emerging markets are cheaper than average. So I honestly think that if the US can give you about 5% total return per year over the next five years, I think Europe and emerging markets can give you about 10%. I think that’s where the opportunity is.
WATCH THE FULL INTERVIEW HERE: What people are missing when it comes to trade, stocks, and the market’s favorite recession signal