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US equities

Continuing the march forward

This table features text accompanying heat diagrams for U.S. Equities. The heat diagrams, gauging Manulife Investments' outlook from Bullish to Bearish, indicate a stronger than neutral view on both, along with detailed rationales for each position.

Corrections are normal.

Stock market corrections are very common and very difficult to predict. Since 1980, the S&P 500 index has fallen an average of 14.3% in any given calendar year but is positive 78% of the time with an average return of 10.3%

S&P 500—Calendar Year and Max Intra Year Returns

1980 – current

This bar chart shows calendar year returns for the S&P 500 from 1980 to 2020. It also shows the maximum drawdown in each calendar year.

Source: Manulife Investment Management, Bloomberg, as of December 31, 2020.

The earnings outlook is improving

As we look forward, we’re starting to see signs that the global economy may have bottomed and has shifted from contraction to recovery. Since the month of August, the U.S. ISM purchasing managers’ index (PMI) shows that manufacturing activity has increased materially on a month‑over‑month basis. Historically, the ISM PMI leads S&P 500 Index earnings growth by six months. We believe economic momentum will keep earnings growth strong on a YOY basis through 2021.

ISM PMI vs S&P 500 Index earnings growth YOY (advanced six months)

2000 – current


This chart illustrates that earnings growth in the US has historically had a strong correlation to the ISM Purchasing Managers Index with a 6-month lag. The data starts at 2000 and ends at March 31, 2021. At current level of 64.7, the PMI would imply strong earnings growth in 2021.

Source: Manulife Investment Management, Bloomberg, as of March 31, 2021.

Earnings growth is likely to ease any valuation pressure

Macro indicators would suggest 2021 will see a strong earnings growth environment that may include not only a recovery back to 2019 levels, but even stronger growth given the release of pent-up demand and excess personal savings. During periods when earnings growth is greater than 30% on a year-over-year basis (as we believe it will be in 2021), the average P/E contraction is 4.1 multiple points. When earnings growth is greater than 30% YOY, the average and median 12-month returns for the S&P 500 Index are 10.2% and 12.4% respectively.

Year-over-year change in S&P 500 Index earnings per share vs Change in trailing P/E multiple

1972 ‑ current 

This chart shows year over year earnings growth compared to the year over year change in Price to earnings ratio of the S&P 500 from January 1972 to March 31, 2021. These two data sets have an inverse correlation so they move in opposite directions to the upside and downside over time. The axis for the change in price earnings ratio is inverted so the image shows how closely they follow each other. Recently the price to earnings ratio is quite high but since the axis is invers the line is low. The earnings growth line is also low.

Source: Manulife Investment Management, Bloomberg, as of March 31, 2020.

Momentum begets momentum.

Equity markets often follow Newton’s First Law of Motion, “an object in motion, remains in motion”. Historically, when the S&P 500 Index is up over 20% in a six-month period, there is a 48.6% chance that it will be up more than 10% in the following six months. This is a 10% higher probability than the chance it will be up over 10% in any six-month period.

Historical Occurrence of Market EventsS&P 500 Index Following a Gain of > 20% Within 6-months

1927 ‑ 2020

This bar chart shows the frequency returns greater than 20% within a 6 month period is 16.4%. Then is shows that the chance of a return of a drop of greater than 10% following a gain of 20% is 25.%, which is essentially the same chance of a drop of greater than 10% in any 6-month period. It then shows that the chance of a gain greater than 10% followinga gain of 20% within six months is 48.6%, which is much greater than the probability of a gain of 10% or more in any 6-month period which is only 38.2%.

Source: Manulife Investment Management and Bloomberg, as of December 31, 2020.

Manulife Investment Management’s sample strategy

This proportional bar chart shows a rough breakdown, in percentage terms, of a sample portfolio of Canadian, U.S. and international equities and fixed income, including a brief outlook discussion for each asset class.

Canadian equities

• Favour a selective approach to Canadian equities.

• Consider diversifying business risks, not just sectors.


US Equities

• Look for opportunities to take advantage of market dislocations.

• Consider dollar‑cost averaging into equities.

International developed market equities

• Consider less constrained strategies that can seek out opportunities wherever they may present themselves.

Emerging Market equities

Opportunities may exist within the emerging markets, specifically in the Asia ex‑Japan region.


Fixed Income
• Favour flexible strategies that can seize opportunities wherever they may be.

•Consider using different types of bonds for different objectives, whether it is downside protection or enhanced yield.

•Be mindful of the potential currency impact on global allocations.



Source: Manulife Investment Management as of December 31, 2020. For illustration purposes only. Performance histories are not indicative of future returns. The information in this document does not replace or supersede KYC (know your client) suitability, needs analysis or any other regulatory requirements. Clients should seek the advice of professionals before making any investment decisions.