With 2014 quickly coming to an end investors are eager to know if the bull market will continue into 2015. It is our belief stocks will continue to deliver mid to high single digit returns in the upcoming year. The focus will be more so on earnings rather than valuations. We will discuss this later in the article.
There are three things we feel will contribute to the bull market continuing into 2015. A benign global monetary policy, a more favorable policy climate in Washington and of course, the 3% economic growth the country has experienced.
Since World War II the average annual gains on stocks have been anywhere between 7% and 9%. Thus, when it comes to our forecast, history is on our side. We predict, or forecast, a 5% to 9% gain on U.S. stocks. This includes dividends and is based on how its measured by the S&P 500.
Derived from the EPS, or earning per share, for companies on the S&P 500 that have grown between 5% and 10%, our earnings gains are supported by two very important things. Our expectations the global economy will continue to grow and stable profit margins next year. We believe it will be stocks, and not bonds, leading the way for investors in 2015.
If there is one word that would describe the 2015 stock market it would be transition. You can expect a lot of transitions to take place in the coming year. When a cycle is in transition it can lead to volatility and fluctuations. The most important cycle to pay attention to is the economic cycle. The good news is this cycle will not reach a recession in 2015. That means the stock market is in a position to offer up some pretty solid gains to investors.
Since 1950, any year in which the U.S. economy did not enter into a recession, the odds of the S&P 500 having a positive year were 82%. The average gain during those years was 11%.
The problem with recessions is they are very difficult to predict. They don’t happen on a set schedule. Even still, based on our research and several leading indicators, we believe the probability of a recession in 2015 is slim to none. Based on that information, investors should expect solid returns in the coming year.
It’s All About the Earnings In 2015
In 2015 we expect earnings to do all the heavy lifting. It is what will produce stock market gains for investors. Not valuations. With steady economic growth in the United States and stable growth overseas, the S&P can expect low to mid single digit growth as far as revenue goes.
Companies may be limited in their ability to expand profit margins as the economic cycle advances. However, thanks to low borrowing costs and low commodity prices, there is no reason profit margins shouldn’t remain stable. In addition, the EPS calculation may be lifted by share buybacks from corporations. Based on this information we believe the EPS will see high single digit growth next year.