Wall Street has seized on a new reason for continued optimism in the correction-defying stock rally: coordinated global growth.
The recovery of the world economy has benefited stocks all year. But ever since the International Monetary Fund upgraded its growth estimates for nearly every developed economy except the U.S. earlier this month, Wall Street has settled on the the idea that the world's economies will create a powerful engine to turbocharge the bull market moving in the same direction. Last week, prominent strategist Tom Lee of Fundstrat Global Advisors, one of the most bearish on Wall Street, finally raised his target for the S&P 500 Index. The reason for the optimism? Tightening bond spreads, and, yes, stronger-than-expected global growth.
Coordinated recovery has taken over in part as the explanation for the 21 percent rise in the stock market in the past year because the previous one, anticipated corporate tax cuts, didn't seem to be holding water anymore. Tax cuts are at best a 50-50 shot. And even if they do come to pass, the market seems to have overestimated their benefit. Goldman Sachs's top U.S. strategist estimates the S&P 500 should rise 250 points if a corporate tax plan passes. The S&P 500, though, is already up nearly 450 points since Donald Trump was elected.
But, as with tax cuts, stock investors, especially those in the U.S., may be placing too much faith in the global economy. First, that coordinated recovery hasn't lifted growth that much. The IMF increased its estimate for world growth to 3.7 percent for next year, which is about what the IMF was predicting in 2015 for the next year's growth before estimates began to slip.
Second, while global growth matters a lot to the U.S. stock market -- about 40 percent of U.S. sales come from overseas -- it appears as if the U.S. stock market is benefiting more from global growth than other places, even though much of the growth is taking place elsewhere. For instance, the S&P 500 is up 21 percent in the past year. China's Shanghai Stock Exchange Composite, however, is up only 12 percent. And GDP growth in Asia is expected to be much stronger than in the U.S. -- 4.8 percent compared with just 2.4 percent in the U.S. next year. Overall, stocks around the world are up just more than 20 percent, only slightly worse than in the U.S. but with much better economic growth prospects.
And the difference is even more pronounced when it comes to valuations. The S&P 500 has a price-to-earnings multiple of nearly 18 based on next year's earnings. Asian stocks, however, are trading at just more than 13 times earnings. P/E's in Latin America are 14.25. Shares in India, which is projected to be one of the fastest-growing large economies in the world next year, have a P/E of just under 17.
Other factors go into P/E's, of course, including interest rates and political stability. But the premium that the U.S. is getting looks bigger than average, and the political stability in Washington looks less than normal. A growing number of market watchers are saying there is more value for stock investors outside the U.S. So far that hasn't weighed on U.S. markets, but if the gap between where the growth is and where it's being priced in continues to widen, it could be.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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