Stock Outlook: High Valuations and Rising Long-Term Interest Rates

Written by Melda Mergen, CFA, CAIA

Despite some near-term concerns, we see opportunities for both U.S. and global stocks.

U.S. large-cap stocks are historically expensive, but that doesn’t mean there aren’t opportunities. investors, says Melda Mergen, head of global equities. This means we need to dig a little deeper to understand where valuations are justified in the United States and around the world. There are exciting, long-term themes for investors, and we’re seeing companies innovate in the U.S. and around the world. Although there are near-term concerns about geopolitical risks and persistently high interest rates, Mergen remains excited about the outlook for stocks. Watch below:

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Using overall market cap, the S&P 500, and especially the price-to-earnings ratio, there’s no doubt that compared to the past, large-cap stocks look expensive. That is, we If you look at the previous highs, which were from late 2021 until today, valuations have actually declined. So the performance in the market has been largely supported by revenue growth, which is a healthy performance for the market.

The longer interest rates remain high, the higher the cost of capital will be. Most large-cap companies also took advantage of very low interest rates in 2020. So if you look at the large cap group, their debt is quite long-term and low interest rate. So they’re not as sensitive to interest rates as people think. Smaller caps or short-term debt are companies that need to be more careful and make sure higher interest rates don’t impact their ability to make good capital spending decisions. Lower interest rates are very welcome as it will provide relief to these businesses.

The US has outperformed the rest of the developed and emerging markets for some time now, but everyone is nervous about valuations, so although that’s justified, we see a lot of opportunity globally, especially underpinned by valuations. Cheap is never an investment thesis, but at some point when it gets this cheap, you should look at these opportunities. In Europe and emerging markets, we are seeing several opportunities. Inventory by stock. It’s not just investing in the overall market, it’s actually finding the local winners in those markets and they’re actually getting a discount right now.

I believe that the U.S. economy and the global economy is really promising in terms of innovating and making good decisions over the long term. So I’m still excited. Of course, there are also short-term concerns about geopolitical risks and stress about rising interest rates. And those are things we always worry about in the short term. But at the corporate level, as active managers, we look for really good themes and companies. They are the winners of the future. So it’s always interesting to be able to invest in them.

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