Over time, strong U.S. equity market returns have rewarded patient investors especially those who were steadfast during the turmoil of early 2020. Since last April, equity prices have staged a powerful rally. By late June of this year, the S&P 500 had soared nearly 94% from the lows on March 23, 2020. As we pass the mid-year mark, U.S. equities continue their upward trends to the delight of most. However, many investors are now questioning whether future gains are on the horizon, especially since key U.S. indexes are at or near all time highs.
Recent earnings have been exceptionally strong which should help allay some valuation concerns. For the second quarter of 2021, the S&P 500 index is forecast to have the highest year-over-year growth in earnings since 2009 according to FactSet. Quarterly revenue growth and favorable macro conditions point to continued opportunities for equities to deliver positive gains. However, we know that markets can be volatile and attempting to forecast future downturns or market timing are not particularly prudent long-term investment strategies. On the other hand, identifying high quality companies with strong fundamentals to outperform over the long-term serve client portfolios well.
One of the biggest drivers of performance is overall asset allocation. For balanced portfolios we believe it is important to maintain an allocation to high quality bonds as a foundation of stability to fund required withdrawals. Bonds continue to play a defensive role in portfolios for many downside risks. However, as we continue to search for companies with the best fundamental prospects, we find a number of opportunities outside the U.S. that offer attractive valuations, long-term appreciation, and the added benefit of increased diversification.
An allocation to international equities smoothes out returns and reduces portfolio volatility. In recent years, non-U.S. allocations have declined as U.S. markets have continued to make outsized returns. But no investment category is permanently better than another. American and foreign markets relative weightings shift over time. In 1970, American stocks represented almost 65% of all global equities. In the 1980s, with Japanese stocks soaring, the U.S. share fell to 29%. The trend reversed course in the late 1980s, and by 2020, the U.S. market accounted for 58% of the total global market. Today, more than 40% of the world’s market cap is located outside the U.S. This is a reminder that we should assess equity allocations today to ensure they are properly diversified and well positioned to take advantage of future market leadership.
With the American economy roaring back to life and U.S. markets still strong, the rest of the world is playing catch-up. International stocks are selling at a discount to their U.S. counterparts. There appears to be more room for valuation expansion overseas. Identifying stocks that are trading at a discount to what they are worth enables us to take advantage of long-term capital appreciation opportunities.
What’s more, many foreign developed companies sport higher dividends than their American peers. If the search for retirement income remains a challenge for the foreseeable future, it could favor stocks in developed markets with generous payouts. Finally, inflation fear present in the U.S. is less of a concern abroad. That means that currencies and consumer prices could be more stable abroad, and therefore international equities could be less vulnerable to inflationary pressures.
Overall, we feel confident that our portfolios are well diversified to capture attractive investment opportunities at various stages of the global recovery. Please contact us if you would like an individualized review of your asset allocation and performance returns. We wish you and your families continued health and happiness.
