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2021 was a remarkable year for US financial assets. US equities returned an eye-popping 28.7%, extending their gains since the trough of the global financial crisis to 812%—an outperformance of more than 500 percentage points relative to non-US developed and emerging market equities.
As many of our readers know, we in the Investment Strategy Group have consistently recommended clients stay invested in equities and strategically allocate a greater portion of their equity portfolios to US stocks for the nearly 13 years that we have been writing these yearly Outlook reports. Yet such outsized returns have led clients and colleagues to ask whether we are finally at a tipping point where the stay invested recommendation has reached the end of its shelf life and the time has arrived to underweight US equities.
In Section I of this report, we explain why we believe our recommendation to stay invested remains valid. We focus on valuations, the earnings outlook given the global economic backdrop, and the absence of what some have termed froth or irrational exuberance in US equities based on financial market flows and portfolio positioning. Importantly, we compare and contrast the current financial market backdrop to that of the dot-com bubble in order to address a frequently and not unreasonably asked question: are we at the precipice of another major downdraft such as the 49% peak-to-trough drop in equities between March 2000 and October 2002?
We then turn to our one- and five-year expected returns and our more opportunistic tactical tilts. We conclude Section I with the key risks to our outlook, including the pandemic, inflation, tightening of monetary policy, recession and high-impact geopolitical flare-ups. This is followed by our outlook for global economies in Section II and our forecasts for global financial markets in Section III.
We invite you to read our views and investment recommendations in Outlook 2022: Piloting Through.
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