Equities have jumped some major hurdles and broke new highs, but the markets are running out of steam after a multi-year bull rally and still face some challenges ahead. Consequently, investors should consider high-quality stock exposure, such as exchange traded funds that track dividend growers, as a way to limit risks while participating in any upside potential.
In recent weeks, U.S. stocks have pushed higher on a better-than-expected second quarter earnings season. U.S. valuations, though, are beginning to look pricey, so any further gains in equities will have to be supported by earnings growth.
“We believe further gains require a meaningful improvement in corporate earnings, particularly in developed markets,” BlackRock analysts, led by Richard Turnill, said in a research note.
“Stocks can still climb, provided EPS continues to recover and inflation remains subdued,” Sam Stovall, Managing Director and U.S. Equity Strategist at S&P Global Market Intelligence, said on a recent webcast.
The stock market still faces a number of headwinds that could cause another risk-off event and trigger another major sell-off.
“High U.S. valuations and strong flows into U.S. equities already appear to reflect part of the good news. A U.S. market overweight has become a consensus trade, our analysis shows, raising the risk of sudden reversals,” according to BlackRock.
For instance, Stovall pointed to a so-called Wall of Worry that could shake investment sentiment, including an aging bull market, an earnings recession, a Federal Reserve rate hike, volatility in the equities market, depressed oil prices, lone-wolf terror attacks, an upcoming U.S. presidential election and a post-Brexit environment.
Consequently, during periods of heightened uncertainty but continued slow growth, investors may seek out more sturdy or stable companies.
“Investors tend to favor stocks with above-average consistencies of raising EPS and dividends during challenging times,” Stovall said.[related_stories]