Last November, the day after Trump was elected, Jeffrey Saut, Chief Investment Strategist at Raymond James, told FS Insider that Trump’s win was bullish for the economy and markets, particularly small cap US stocks.
With the S&P 500 now up around 12% and the Russell 2000 Small Cap Index up 17% in a little less than four months, Jeff is now more cautious near-term but is still sticking to his long-term bullish outlook for the US stock market.
His company’s intermediate-term proprietary model and short-term proprietary model flipped positive the week before the presidential election, suggesting there was going to be a rally no matter who was elected, Saut stated. But Trump’s win obviously gave the markets further upside, he added.
In the short term, Saut is cautious, noting that he started raising cash and trimming positions last month. Here’s what he had to say:
Looking out further, however, his long-term proprietary model hasn’t turned negative so he still believes we’re in a secular bull market, which could last another 6 to 8 years according to his research.
Do Valuations Signal Trouble for the Bull Thesis?
Many have pointed out that, based on valuation indicators such as the Crestmont P/E, the Cyclical Adjusted P/E, and the Q ratio, that the US stock market looks too expensive—in fact, in averaging these valuation indicators together, the S&P 500 has reached the second highest valuation in history after the Tech Bubble.
However, Saut doesn’t agree with that analysis, noting a number of factors that make historical valuation comparisons misleading.
“First of all, I don’t think we are at that high of a valuation,” he said. “The cyclically adjusted P/E would have kept you out of the market for the past 8 years. I don’t have much use for a market valuation metric that would have kept me out of a 230 or 240 percent market move.”
We also have more high-growth, high-margin companies populating the S&P 500 right now than ever before, he added. By this logic, he believes the S&P should probably carry higher valuation metrics than the historical mean.
An Earnings-Driven Bull Market
We’re seeing a handoff from monetary policy to fiscal policy in the economy, Saut stated, as well as a less onerous regulatory environment.
“I also think we’re seeing a handoff in the secular bull market from an interest rate-driven secular bull market—where interest rates come down and price/earnings multiples expand—to an earnings-driven secular bull market,” he said.
We made the earnings trough in the second quarter of last year, he added. Earnings flipped in the third quarter. The earnings for the fourth quarter came in for the S&P 500 at around an 8 percent growth rate.
“I think it’s going to become more and more evident that we have changed over to an earnings-driven secular bull market in the quarters ahead,” Saut said. “The earnings comparisons coming up are going to look good because the earnings were so bad in the first and second quarters of 2016.”
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