PORTUGAL 2021 Midyear Market Outlook

A Focus on Earnings Growth

Historically high valuations signal expectations could be stretched

Equity Return Potential Appears Constrained

Most global equity markets are expensive relative to their historical averages, even after taking ultralow interest rates into account.

Strong growth expectations already appear to be priced into U.S. equities. This means return prospects could be subdued even if earnings continue to rise.

Non-U.S. equities may offer potential opportunities for outperformance in the second half. Inexpensive currencies are positive for many emerging markets (EMs).

Are Markets Overextended?

Equity valuations reflect very optimistic earnings growth expectations.
Although speculative excesses have appeared in some sectors, equities overall do not appear to be in a bubble.

Regional Opportunities

Some markets have yet to see an earnings rebound as robust as in the U.S. This potentially creates room for non-U.S. markets to outperform.
Earnings in Japan are leveraged to a cyclical recovery.
European banks could benefit from steeper yield curves.

Style Performance

The rotation from growth to value may slow unless earnings surprise to the upside.

The Takeaway

Valuations are high, and strong earnings growth is built into U.S. equity prices.
Non-U.S. equities may offer greater performance potential.

Spotlight on Valuations

Despite strong earnings growth, valuations have risen toward the top of their 15-year ranges in many equity categories, especially in the U.S.

Although valuations historically have not been reliable for tactical timing, they have a good track record at measuring return potential relative to longer-term averages, according to Robert Sharps, president, head of Investments, and group CIO.

Global Equities Are Not Cheap
Valuation percentile rankings vs. past 15 years¹

As of May 31, 2021
Past performance is not a reliable indicator of future performance. Index performance is for illustrative purposes only and is not indicative of any specific investment. Investors cannot invest directly in an index.
¹Relative valuation percentiles based on an equal-weighted average of next 12 month price/earnings, price/book, and price/cash flow ratios. Higher ranking = more expensive.
Indexes: U.S. Large Growth: Russell 1000 Growth Index; U.S. Large Value: Russell 1000 Value Index; U.S. Small-Cap: Russell 2000 Index; Global Equity: MSCI All Country World Index; EM Equity: MSCI Emerging Markets Index; Japan Equity: MSCI Japan Index; Europe ex UK Equity: MSCI Europe ex UK Index; UK Equity: MSCI UK Index.
Sources: MSCI and FTSE/Russell (see Additional Disclosures). T. Rowe Price analysis using data from FactSet Research Systems Inc. All rights reserved.