Richard Bernstein, founder of Richard Bernstein Advisors and former chief investment officer at Merrill Lynch, has some advice for investors worried about a stock market correction in the U.S. and looking for alternatives overseas.
The Bull Market Remains Intact
The bull market, now in its seventh year, continues and could extend even after the Federal Reserve begins to raise rates for the first time in nine years, according to Bernstein. The "incremental negative" that may come initially after the Fed hikes rates will be "more than overwhelmed by the boom in earnings growth," said Bernstein, speaking before the ETF.com Global Macro Conference last week. "Earnings will overtake rising rates. Markets still go up after the Fed starts raising rates."
Earnings for the S&P 500 are expected to grow 1.6% overall this year, but 8.2% excluding the energy sector, according to FactSet's latest Earnings Insight. For the second quarter, earnings are forecast to fall 4.7% overall but grow 2% excluding energy.
Another indicator that the bull market is intact: Other than energy, Bernstein hasn't seen any "end of cycle behavior," which would be an early indicator that the market is poised to reverse. "There's no excessive leverage or big buildup in inventories" in any sector "except energy," said Bernstein, referring to examples of that end cycle behavior.
Currency Is the Most Important Issue for International Markets
Investors remain bullish on European stocks even though they are also concerned about the situation in Greece and higher yields, according to the latest Bank of America Merrill Lynch fund manager survey. But what they should also be worrying about is the currency exchange, said Bernstein. "European shares are up in European currency but not [necessarily] in other currencies," said Bernstein.
The MSCI European stock index is up 11% year-to-date, but only about 5% in dollar terms because the dollar has appreciated about 6% against the euro.
