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US equities

Continuing the march forward

US Equities - Neutral/Bullish

S&P 500 may not be as expensive as you might think

While the S&P 500 Index looks expensive on some metrics, such as price‑to‑earnings (P/E) ratio, it’s not as expensive on others. One such metric is price‑to‑free‑cash flow, which would suggest that it’s in line with its longer‑term average valuation. It’s important to examine different valuation metrics to get a complete picture of the equity markets.

S&P 500 price-to free-cash flow

1990 – current

S&P 500 price-to free-cash flow1990 – current

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


ISM PMI vs S&P 500 Index earnings growth YOY (advanced six months)  2000 – current

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

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 

Year-over-year change in S&P 500 Index earnings per share vs Change in trailing P/E multiple  1972 ‑ current

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

Returns will likely be driven by earnings

Equity market returns are driven by three factors: dividend yield, earnings growth, and change in valuation (P/E ratio). In the year following strong rallies in the P/E ratio, valuation often gives way to earnings growth as the driver of returns.

Contribution to return by earnings growth, P/E ratio and dividends 

1970 ‑ 2020

Contribution to return by earnings growth, P/E ratio and dividends 1970 ‑ 2020

Source: Manulife Investment Management and Bloomberg, as of September 30, 2020.

Manulife Investment Management’s sample strategy

Manulife Investment Management’s sample strategy

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.