Crispin Murray: Equities can continue grinding higher if these risks remain contained

Historically high valuations don’t mean markets cannot keep going up. CRISPIN MURRAY explains what’s driving markets – and the risks to watch for

• Large parts of US market not excessively over-valued
• Potential risks: stagflation, retail slowdown, fading AI theme
• Find out about Pendal Focus Australian Share fund
• Watch Crispin Murray’s new Beyond The Numbers bi-annual ASX outlook

EQUITY markets are trading at historical highs – but can continue grinding higher if key risks facing the US economy remain contained, says Pendal’s head of equities Crispin Murray in a new webinar.

In the US, the S&P 500 is trading at about 23 times earnings, while the NASDAQ is around 28 times.

“That’s right at the high end of those historic ranges,” says Murray in his latest Beyond The Numbers bi-annual ASX outlook.

“It means markets are vulnerable if there is a dramatic change – whether it’s earnings or the economy.”

That said, valuations are not uniform across the market.

Excluding the five-biggest names reduces the S&P 500’s PE to about 21 times – still high, but not extreme – while an equal‑weighted S&P 500 sits closer to 17 times, near historical averages, says Murray.

“That’s telling you that a large part of this US market is not excessively valued, and it’s very much a concentration in those tech-related names.”

Meanwhile Australian shares powered 11 per cent higher over the six months to September, despite dipping into correction territory during that period as growth and liquidity outweighed policy uncertainty.

(Scroll down for Crispin’s take on ASX reporting season.)

“It’s certainly been a roller coaster … that just highlights how the market is not particularly efficient in pricing,” says Murray.

“At Pendal, we believe you make money by anticipating change and taking advantage of a market that has become very focused on the short term.”

The risks to watch

Risks to the current market rating include:

• The looming threat of stagflation driven by policy headwinds
• Market concerns about US fiscal sustainability
• A risk that the AI boom fades
• Any potential removal of liquidity if retail flows slow or corporations reduce stock buy-backs

US government policy is at the core of the challenges.

Lower immigration is curbing population growth – a key driver of GDP – while tariffs are feeding through to prices, with roughly 40 per cent of their impact already visible in consumer prices, says Murray.

Meanwhile, monetary policy remains very tight.

“What that means is the outlook for the economy is quite different today than where it was at the beginning of this year.

“Looking into the fourth quarter, US growth is set to be below 1 per cent, inflation heading towards 4 per cent.

“It does look a lot like stagflation – and clearly, if we did have that tipping point in the economy, earnings go down, and the market won’t sustain its current multiple.”

Positive drivers remain in place

Still, that scenario appears unlikely.

“Corporate profitability continues to be good,” points out Murray.

“This is important, because it means companies still have the ability to invest, and it also means that they’re less likely to undertake substantial job-cutting programs.

“There’s been enormous growth in the data centre and the power area of the economy – and that is helping prop up growth.

“Consumers have seen their net worth rising dramatically over the last few years, and that’s estimated to support growth by between half and 1 per cent.

“And the final issue, which I think is probably the most important for now, is that the policy environment – which has been negative – is turning more constructive for growth.

“Five rate cuts are priced into the market, fiscal stimulus from the budget Bill next year is estimated to be close to 1 per cent positive, and clearly the US has been set up to the electoral cycle and ensuring the economy is in good shape ahead of the mid-terms.

“So, we don’t think we do cross that tipping point, but it’s clearly a major risk.”

Lessons from ASX reporting season

In Australia, several themes stood out in the recent full-year ASX earnings season, including high levels of post-result volatility.

Somewhat unusually, the best-performing sectors during reporting season were not correlated to earnings.

Resources stocks were buoyed by optimism around China, while gold stocks lifted on concerns about government financing and central bank buying.

On the negative side, earnings were a driver of underperformance – led by building materials and steel where ASX companies with exposure to the US suffered weakening demand.

“Overall, earnings revisions weren’t that exciting but when you dig down into it, most of the negatives were quite stock specific.

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“It was companies that were not necessarily executing as well as they should [or] those exposed to the US.

“Outside of those names, though, most companies were either reasonably comfortable with the outlook or actually quite positive.

“So generally speaking, I think the outlook for earnings is stable to slightly positive as a result of what we saw in that earnings season.

“We still get mid-single-digit earnings growth, which means returns aren’t exciting in Australia, but we still get a reasonable outcome.”

Data centres a good way to play AI

One question on investors’ minds is the prospect of the AI boom continuing.

“There is scepticism that the money being spent is not generating a return – and it’s something we’re watching carefully,” Murray says.

“But one thing I’ll emphasise is that the spend is real – and the people who are investing have the money.

“These hyper scalers – Amazon, Google, Microsoft, Meta and Oracle – have the financing to spend this money, and they believe they are getting a return.

“Consumers are also increasingly using these products.”

Murray says the world has a shortage of “compute” – an industry term for the processing power, memory and storage needed to perform calculations and run applications – and this is an opportunity for Australia and particularly local data centres.

“One of the challenges with investing and building data centres in Australia is access to land, access to capability, getting planning approval and getting power access.

“These things mean that there is a structural under-supply of capacity in Australia, and the companies that can deliver it are very well positioned.

“We still believe the market underestimates the confluence of not just AI demand, but the requirement for companies to move to the cloud to enable themselves to take part in utilising AI to run their businesses better.”

About Crispin Murray and the Pendal Focus Australian Share Fund

Crispin Murray is Pendal’s Head of Equities. He has more than 27 years of investment experience and leads one of the largest equities teams in Australia. Crispin’s Pendal Focus Australian Share Fund has beaten the benchmark in 12 years of its 16-year history (after fees), across a range of market conditions.

Pendal is a global investment management business focused on delivering superior investment returns for our clients through active management. 

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