Since the Q4 update there has been no significant change in the investment outlook or portfolio positioning. Notwithstanding the recent surge in corona cases and the intensification of government lockdown measures, the global recovery thesis remains intact supporting a return to earnings growth for economically dependent companies.

The charts below show that government bond yields and yield curves continue to support this outlook and earnings estimates for companies continue to move higher (expected to return to 2019 levels by the end of this year in the US). In addition, credit spreads remain benign and market breadth supportive of further gains.

That said, it is becoming increasingly difficult to ignore the warning signals flashing from extended valuations at the index level and particularly in the US. Historically, excessive valuation has been a reliable indicator of long-term returns (5 to 10 years) but has admittedly been a poor indicator of shorter-term performance (1 year). The graphs clearly reveal that this extended valuation is virtually independent of which valuation metric is chosen.

We are also mindful of the fact that investor sentiment is approaching stretched optimistic levels which may be associated with increased short-term market volatility. Furthermore, investor flows into cyclical sectors have picked up considerably. Simply put, we are no longer alone in our admiration for cyclicality. Again, while a longer-term positive, the probability of some near term resistance has risen.

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