Six Themes That Will Drive the Next Five Years

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Posted by Robert Huebscher - Advisor Perspectives

on Tuesday, 28 November 2017 06:47


Those looking for an optimistic forecast for U.S. equities can turn to Northern Trust. Bob Browne, its chief investment officer, identified six themes that will drive the capital markets over the next five years. Taken together, they translate to 5.9% annual returns for U.S. stocks over that period, which includes 2017.

Browne spoke at the Schwab IMPACT conference in Chicago on November 15. He oversees much of the $1.1 trillion under management at Northern Trust.

Browne predicted that developed markets, exclusive of the U.S., will earn 6.8% and emerging markets will return 8.4%. Because U.S. markets have returned so well this year, with equities returning approximately 17% year-to-date, he said we are “stealing future returns” in 2017.

How does he get 5.9% returns with PE ratios starting at approximately 20?

Browne said that revenue growth would contribute 4.3% annually (consisting of 2% from inflation and 2.3% from nominal GDP growth), 1.9% from dividends and 0.9% from enhanced margins and stock buybacks. Those numbers add up to 7.1%, but he applied a 1.2% “haircut” to account for valuations (PE ratios) “normalizing” to get to 5.9%.

Browne is not predicting a recession in the U.S. over the next five years.

He said the emerging market returns will be higher mostly because of stronger revenue growth at 6.7%.

Here are the six themes that Browne said should matter to investors:

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