Even with stocks experiencing tremendous growth over the past decade, some analysts have recently suggested that the equity market's best days are behind us. The reality, however, may turn out to be a little more nuanced.
"While history is an important teacher and returns may not quite match the past decade, some fundamental changes in the business, economic and market landscape make stocks still attractive moving forward, in our view. We call these changes the 'Great Eight Reasons,' says Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank.
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Bear Market
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Market Decode
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Lost decade for stock?
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Please read important information at the end of this program. Recorded on 10/24/2024.
[Chris Hyzy speaking throughout]
Based on recent predictions of a coming "lost decade" for stocks, you might think markets have peaked and the best days are behind us. But let's really dive in to examine this further.
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Chief Investment Officer, Merrill and Bank of America Private Bank
I'm Chris Hyzy, with eight reasons we believe equity markets have room to run over the long term even in the face of premium valuations.
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So why the gloomy forecasts? After a decade of 13% annualized S&P 500 growth,Footnote 1 many analysts believe equities are substantially overvalued.
Based on historical models, returns must come back to earth, the thinking goes — especially with so much value concentrated in handful of "mega" tech companies.
While history is an important teacher and returns may not quite match the past decade, some fundamental changes in the business, economic, and market landscape make stocks still attractive moving forward, in our view. We call these changes the "Great Eight Reasons."
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The Great 8 Reasons
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#1 "Asset light" companies
First: More companies today are "asset light", which means they have generally less fixed costs such as heavy equipment and labor. This gives them greater flexibility and more efficient use of capital to invest.
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#2 tech-driven productivity
Second: Most companies are now technology driven, enhancing productivity and economies of scale on a much more rapid basis.
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#3 innovation protects margins
Third: Innovation that is integrated enables companies to protect and advance profit margins.
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#4 Diversified markets
Fourth: Even with those mega companies dominating the indexes, markets are more diversified and less cyclical today, reducing the frequency and severity of economic and profit cycle downturns.
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#5 Delayed public offerings
Fifth: As private markets grow, companies are waiting longer to go public. Scarcity of Initial Public Offerings can elevate valuations as the supply of public equity available remains low relative to demand. And when companies do go public, they tend to be more mature and more profitable.
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#6 Infrastructure investment
Sixth: Asset-light companies that are cash rich are investing heavily in data centers, power generation and other infrastructure, which doesn't need as much debt financing.
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#7 Interest rate stability
Seventh: Interest rate stability. After years of fragility in yields, a return to more normalized and transparent rates enables greater liquidity, planning and capital investment.
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#8 Wealth transfer and retirement
Finally: Amid an historic transfer of wealth and with millions of people planning for retirement, we believe the need to invest will only grow, particularly as the level of supply of assets is low.
Where will valuations go from here? No one knows for sure. But while we may not experience another decade of 13% annual growth, we believe the next 10 years hold promise for equity investors.
For more timely insights on the economy and markets, be sure to read our weekly Capital Market Outlook.
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Important Disclosures
The opinions expressed are as of the date of this video and are subject to change.
Investing involves risk, including the possible loss of principal. Past performance is no guarantee of future results.
Investments have varying degrees of risk. Some of the risks involved with equity securities include the possibility that the value of the stocks may fluctuate in response to events specific to the companies or markets, as well as economic, political or social events in the U.S. or abroad.
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The Chief Investment Office (CIO) provides thought leadership on wealth management, investment strategy and global markets; portfolio management solutions; due diligence; and solutions oversight and data analytics. CIO viewpoints are developed for Bank of America Private Bank, a division of Bank of America, N.A., ("Bank of America") and Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S" or "Merrill"), a registered broker-dealer, registered investment adviser and a wholly owned subsidiary of Bank of America Corporation ("BofA Corp.").
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In this Market Decode, Hyzy expands on these reasons and explains why stocks may still have room to grow, even at a time of premium valuations.