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By Ben Baden
S&P 500 companies are on track to report record earnings in the second half of 2011
After years of lackluster stock-market returns -- which many dubbed a "lost" decade -- 2011 is shaping up to be a good year for large-cap U.S. stocks. Fears of a double-dip recession have mostly subsided, the economy is expanding again, and the S&P 500 has almost doubled since its March 2009 low. Individual investors are even warming up to U.S. stock funds, after shunning them in the years following the financial crisis.
Here are six reasons large-cap U.S. stocks look like a good bet:
Positive indicators.
The U.S. economy is officially expanding again, meaning it's now producing more goods and services than it was before the recession began in 2008. Historically, expansion phases have lasted for at least three years. So far, fourth-quarter earnings for S&P 500 companies have been robust. If this pace continues, S&P 500 companies could report record-high earnings in the second half of the year, according to Howard Silverblatt, senior index analyst at Standard & Poor's. What's more, he says, the S&P 500 is currently trading at 14 times earnings. While stocks have rapidly recovered from their lows, Silverblatt notes that the index is still about 15 percent off its all-time high.
"[The U.S. is] the primary beneficiary of an expanding global economy," says Douglas Coté, senior market strategist at
Investors are making a natural transition.
From the beginning of 2008 through the end of 2010, investors poured about $650 billion into bond funds while pulling almost $280 billion from U.S. stock funds, according to the
Emerging markets outflows.
Since around the time the riots began in Egypt late last month, investors have fled emerging markets funds. Emerging market stock funds posted their third straight week of outflows in early February, the category's worst three-week run in three years, according to EPFR Global. "I think what we're going to start to see [is] some money moving away from emerging markets and possibly back towards U.S. equities, and I think some of that money, at least, will have a bias toward bigger companies," says Liz Ann Sonders, chief investment strategist at
Concerns about rising food prices.
Food prices make up a much larger percentage of consumer spending in poorer countries than in the developed world. Sonders says citizens in countries in emerging Asia and Latin America spend a much larger percentage of their total income on food consumption -- 28 percent and 27 percent, respectively. In North America, consumers spend closer to 10 percent of their total income on food. When inflation becomes a concern, central banks generally raise interest rates to slow demand. That's what leaders have done in India, Brazil, and China, the latter of which raised interest rates in early February for the third time in five months. "That's a difficult environment for stock markets," Sonders says.
Volatility has returned.
So far this year, the S&P 500 is up about 5 percent. The average emerging markets stock fund, by contrast, is down about 4 percent, according to
Until recently, emerging markets stocks have crushed U.S. large-cap stocks. From Dec. 31, 2001, through the end of 2010, the MSCI BRIC Index, which tracks the returns of markets in Brazil, Russia, India, and China, delivered an annualized 10-year return of 18 percent, compared with a 1.4 percent annualized return for the S&P 500, according to Factset. That trend is reversing itself somewhat as new risks like inflation and unrest have emerged as challenges for governments in the region. "Volatility is not dead in the emerging markets," Coté says.
Europe's sovereign debt problems.
Outside of U.S. stocks, one of the best-performing asset classes this year has been European stocks. On average, European stock funds are also up almost 5 percent year-to-date. For now, investors seemed to have shrugged off concerns about debt-ridden countries like Ireland and Greece that have recently taken bailouts to tackle crippling budget deficits. Krobsy notes that the German economy has also benefited from higher global growth because many companies in that country rely on exports. Germany's Dax Index is up almost 7 percent year-to-date.
But experts say the debt problems in Europe have only taken a backseat for the short term.
Available at Amazon.com:
The Triumph of Value Investing: Smart Money Tactics for the Postrecession Era
Generation Earn: The Young Professional's Guide to Spending, Investing, and Giving Back
What Investors Really Want: Know What Drives Investor Behavior and Make Smarter Financial Decisions
Investing - Why Big U.S. Stocks Look Like a Good Bet | Successful Investing
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