Investment management firm Loomis Sayles' stock market forecast for 2012 and beyond is quite bullish.
At a media event last Wednesday, Loomis' money managers gave at least four reasons to buy U.S. stocks, especially against the alternative of owning bonds.
Warren Koontz, manager of Loomis' equity group, said from a valuation perspective, earning multiples of around 13 are low and dividend yields of around 2 are high.
Moreover, he sees limited downside risk because corporations have strong balance sheets and Loomis expects the current U.S. economic recovery to continue. And while the U.S. financial system faced a banking meltdown in 2008, the economic and financial challenges today are not as severe, said Richard Skaggs, a senior equity strategist at Loomis.
Skaggs also pointed out that the growth in U.S. corporate profits, the fundamental driver of valuation, has outstripped prices.
Another way of putting it is that the price-to-earnings ratio remains depressed as part of a long trend that started with the dot-com bust of 2000.
For example, corporate earnings of the S&P 500 Index increased 15 percent in 2011 while prices stay essentially flat for the year.
Skaggs believes this trend will end and share price-to-earnings multiples will rise. Investors will get paid for past earnings growth that has not been reflected yet, he said.
Another big trend that will emerge is rising bond yields, said Daniel Fuss, manager of the firms' flagship Loomis Sayles Bond Fund, citing the vast borrowing needs of the federal government.
Fuss thinks the trend could continue for decades and will pick up in earnest once the Federal Reserve stops buying vast quantities of longer-term U.S. Treasurys.
In this environment, typical bonds will not protect investors against rising yields and inflation, while stocks can through growing dividends and share prices, he said.
The tone of Loomis and Fuss, twice the Morning Star Fixed-Income Manager of the Year, differs from the line of bond manager Jeffrey Gundlach of DoubleLine Capital, himself a winner of the award.
Gundlach is bearish on U.S. stocks, at least for 2012, citing the twin tower of risk in debt and high unemployment in the U.S., weakness in the banking sector and high unemployment in Europe.
He believes the U.S. stock market has performed well so far this year partly because institutional managers have a tendency to buy financial assets in the beginning of a calendar year.