Why is the S&P 500 so popular – and where is it headed?
The S&P 500 has always been a well-watched index and has grown in popularity in recent years. But what has spurred this increase? Here are some reasons for this heightened attention and our thoughts on what the future holds for the index. (Fall 2018)
One reason for the popularity of the S&P 500 ‡ is that many U.S. investors prefer domestic stocks due to a phenomenon known as home bias—we invest in what we know. Recent surveys suggest U.S. investors have 70 percent of their equity portfolios in domestic stocks. Yet looking at a global index, the U.S. only represents about 50 percent.
Naturally, investors are focused on performance, and the S&P 500 has outperformed global indexes since 2009. Furthermore, 2017 and 2018 have been particularly good years for the index due to earnings. Sooner or later, earnings drive stock prices.
Globally, economic conditions have been favorable for risk-based assets, such as stocks. The synchronized global growth theme remains intact, but has provided an exceptional backdrop for corporate earnings in the U.S. since approximately one-third of S&P 500 earnings come from their international businesses. In addition, low interest rates, fiscal stimulus and lower corporate taxes have supported higher stock prices.
What’s to come?
There are some potential headwinds that would slow down continued S&P 500 success. One of these would be a trade war, as trade wars are bad for the economy and financial markets. Inflation could also be problematic. Finally, the labor market is tight, and wage inflation is on the rise—both of which may affect margins and earnings.
If current conditions remain stable, however, we expect the S&P 500 to reach new highs and provide investors with an 8-10 percent total return.
Read the full article in U.S. News and World Report‡ to learn more about the popularity of the S&P 500 and outlook on the index going forward.
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