After a significant period of US economic expansion, it would not be unreasonable for some to argue that a recession is around the corner, potentially ending an eight-year bull run for US equities.
However, time is not the best indicator of when a recession is likely to occur or a bull run is to end.
Rather, what causes expansions to end are excesses or imbalances that build up in the system that need to be corrected, such as inventory, inflation or financial excesses.
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We currently do not see these kind of excesses building in the US economy and so do not expect a downturn, at least not within the near future.
Instead, we have had enough economic growth to prolong the expansion, but we have not seen much upward movement in inflation.
Meanwhile, earnings growth has been positive and, due to the improving economy and the possibility of corporate tax cuts, the outlook for US earnings also looks promising.
If you factor in dividend yield too, there is the potential for positive equity market returns as we go through 2017 and into 2018.
On the other hand, the US equity market currently appears fully valued, with the price-to-earnings ratio at a level that has rarely been exceeded.
However, while the US as a whole is more expensive, this has been driven by a select part of the market.
For instance, the technology sector has been driving a lot of the valuation growth, particularly companies like Amazon, Netflix and Facebook, while other sectors, such as industrials and consumer staples, have more comparable valuations to the rest of the world.
At the same time, uncertainties remain. President Donald Trump's bold proposed policies have already affected markets in anticipation of their implementation, but the timing and extent to which these policies will be implemented is unclear.
Meanwhile, markets are anticipating the next moves by the Federal Reserve. In our view, as the hikes tend to signal a positive outlook for US growth, this should be positive for equities.
There is still much cause for optimism for the US equity market, with a positive outlook for earnings growth and a supportive economic backdrop.
However, ongoing uncertainties and a large dispersion of valuations continue to underline the need for selective, research-driven investing.
Martyn Hole is investment director at Capital Group
Bull Points
• An improving US economy
• Outlook for US earnings is positive
Bear Points
• The market currently appears fully valued
• Uncertainties around political and monetary policy
