In a briefing to its wealthy clients, Goldman continues to be sunny on equities.
With the Nasdaq Composite Index surpassing its former March 2000 peak and closing the week with a year-to-date total return of 7.9%, bubble concerns are dominating the headlines once again. After all, both the Nasdaq and the S&P 500 Index closed at new all-time highs on Friday. Not surprisingly, concern about a significant downdraft has increased among investors. These concerns have been exacerbated by the expectation of disappointing first quarter earnings, which have been revised down steadily since last fall partly as a result of falling oil prices. In line with these worries, year-to-date flows into US equity mutual funds have been negative, as shown in Exhibit 1.
We have been on the lookout for bubble valuations since 2013. In our 2014 Outlook, Within Sight of the Summit, we dedicated a notable portion of our introduction to explaining why we did not think US equities were in bubble territory. With the market making further gains since, we are even more vigilant in our search for bubbles today.
Yet, we still believe that US equities broadly, and the technology sector more specifically, are not in bubble trouble yet.
We will first clarify what we mean by “bubble territory.” We will then explain why we do not share the view that US equities are in bubble territory—notwithstanding the impact of a stronger dollar, slower first quarter US economic growth, and pending Federal Reserve interest rate hikes later this year.
We will conclude with our key investment takeaway which is to maintain one’s full strategic asset allocation to US equities.
The presentation can be viewed, Still No Bubble Trouble.pdf (377 KB).