Jonathan Golub, Chief US Market Strategist at RBC Capital Markets, explains why he thinks stocks could hit record highs this year.
Even though 2014 has started off with a whimper for the markets, Jonathan Golub, Chief US Market Strategist at RBC Capital Markets, believes that stocks could hit record highs this year.
According to Golub, while 2013 may have seen the benchmark S&P 500 index rise because the market was bidding up its price relative to its earnings, 2014 will require the economy to grow and, thus drive up earnings. That, in turn, is what will push the S&P 500 higher.
"If we're looking at an economy that's probably going to grow at 2.5% this year – which is a very reasonable number," says Golub, "that should be enough to drive something between 7% and 8% or more of earnings growth."
"If you look at valuations, [stocks] still look very cheap relative to bond," says Golub. "You add those two together and I don't see why you wouldn’t have a double-digit return this year."
Golub says history shows stocks can still have a good year after a great year. In 2013, the S&P 500 had return of 29%.
"If you look at the 10 best years over the last 75, the average return has been about 14% following really great years," says Golub.
Yet the booming market in 2013 came despite modest growth in the economy, notes Golub. Instead, a driving factor in bringing the market up to its highs was the increase in the price of the S&P 500 relative to the index's total earnings.
"Most people think that what moves markets ahead is a better economy and that really should be the case," says Golub. "But, look at last year: We had GDP grow less than 2% sand the market was great. The reason was because stock multiples – P/Es (price-to-earnings ratio) – went up as much as they did."
Yet, while Golub sees growth of only 2.5% in the economy for 2014, some other forecast a higher rate of growth. That could mean a great year for stocks are in store, though he believes a slight gain would be enough to boost the markets higher.
"If you get to 3%, which some people are talking about, then you're really talking about a super year," says Golub. "Frankly, we're not that exuberant. We think modest economy, really strong stocks."
Golub does see some risks ahead for the market, however. To hear what they are, watch the video above.
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