The U.S. large-cap Russell 1000 Index will reach 1,060 while the S&P 500 Index will hit 1,900 by year-end 2014, according to a new report from Russell Investments.
The research predicts that global equities will outperform cash and fixed income assets in 2014, but the paper warns of “risky scenarios” that investors need to be on guard against.
“One [scenario] is that global equity markets move into speculative overdrive,” the report states. “Asset markets have a history of overshooting, and global equity markets could become outright expensive if confidence in the economic outlook takes hold.
“The alternative scenario is that economic growth disappoints and investors conclude that monetary policy has reached its limits,” the report adds.
The research forecasts that equities will appreciate by about 5 percent in 2014, depending on corporate performance. Concurrent with the rising equity valuations, nominal gross domestic product is expected to increase by 4.6 percent, up from 3.2 percent in 2013.
Additionally, the report anticipates the economy will generate 230,000 jobs per month, a number above that of the “Blue Chip consensus” of 194,000 jobs.
Among the report’s additional forecasts for the U.S.:
- Inflation will remain low at 1.9 percent;
- The U.S. Federal Reserve’s tapering will begin in the first half of the year, but the Federal funds rate will not rise until 2015;
- U.S. 10-year Treasury yields will hit 3.2 percent by year-end;
- Single-digit growth in corporate earnings will drive U.S. equity returns. Price-earnings (P/E) multiples will remain broadly unchanged.
Turning to Europe, the report forecasts a “modest” recovery in consumer demand in tandem with reduced budgetary austerity and continuing strength in trade that could yield a growth rate of 0.5 percent to 1 percent.
“We believe 2014 will be a year to remain invested, but not just to buy and hold,” the report states. “With respect to bond yields, we think the core countries will participate in the risking rate environment of the developed world, however, at a slower pace because of lackluster growth and low inflation.”