BCA, Independent Investment Research Since 1949

U.S. Equities: Weak Fundamental Support

Despite a sketchy fundamental backdrop, an accommodative Fed is likely to support share prices for a while longer.


The U.S. equity market capitalization is larger than total GDP, yet profits are steadily losing share relative to GDP. This is not a sustainable combination and a re-coupling is inevitable at some point. We doubt profits will close the gap. Profit margins are mean reverting and have already been well above average for a prolonged period of time. In fact, wage inflation has been handily outpacing pricing power and there is little volume expansion globally. Furthermore, the message from the latest BIS quarterly global credit flows update is that the credit impulse remains a substantial drag on economic activity, and by extension, earnings performance.

Bottom Line: A gradualist Fed, reduced threat of incremental near-term U.S. dollar strength and no imminent risk of a recession could keep U.S. stocks supported despite the questionable long-term fundamentals.

Are Low Rates Jeopardizing Financial Stability?

Excessive financial deregulation, rather than low interest rates, may be the primary cause of financial crises.


Our Global Investment Strategy service argues that low interest rates may not have been the main contributing factor to past financial crises. For example, housing bubbles in the Nordic countries in the late 1980s occurred against a backdrop of high interest rates, while persistently low interest rates in the U.S. in the 1950s and 1960s failed to generate asset bubbles or out-of-control credit booms.

Rather, rapid financial deregulation may have been the reason behind prior crises. Encouragingly, the thrust of recent legislation in the U.S. and many other developed economies has transformed banks into the equivalent of well-regulated utilities. This implies lower rates of return on equity and assets for investors, but also diminished risk of massive losses.

As discussed in the next Insight, low interest rates are not generating the same sort of distortions in the real economy as they did during prior stock market booms.

BCA Research introduces BCA Academy – Providing Economic and Financial Markets Education

BCA Research is excited to announce the launch of BCA Academy, which offers continuous development and educational solutions for the global investment community. BCA Academy brings together the firm’s industry recognized strategists and proprietary research framework to deliver courses that teach investment professionals how to analyze the complex links between economics, financial analysis and investment strategies.

“Markets today are more interconnected than ever before, and investors need to understand how seemingly disparate economic events impact asset classes and investment decisions around the world,” said Bashar AL-Rehany, CEO of BCA Research. “BCA Academy will provide the same quality and depth of understanding that BCA Research is built upon, providing investment professionals the insights and technical ability to make better and more informed investment decisions. For BCA Research, this is an extension of our mission to educate, inform and stimulate meaningful discussions within the investment community.”

BCA Research is registered with the CFA Institute as an approved provider of continuing education programs for CFA Institute members worldwide. BCA Research is also a member of the CPD Certification Service and the content of the “Principles of Macroeconomics & Impact on Capital Markets” training course has been certified by the CPD Certification Service as conforming to continuing professional development principles.

You can read the full announcement here.

To learn more about the BCA Academy, please visit academy.bcaresearch.com.

BCA’s 36th Annual Investment Conference – September 26-27, New York


This exclusive conference will feature discussion and debates from an outstanding and diverse group of leading experts. Watch the video to find out why this year’s New York Investment Conference will be a must-attend industry event.

Featuring a keynote speech on The Global Economic and Financial Outlook by Lawrence H. Summers, Charles W. Eliot University Professor, Harvard University.

Some of the important and relevant topics include:

  • BCA’s top investment ideas for the coming year, covering all major asset classes and regions
  • How could investors generate alpha by exploiting market anomalies?
  • Key macro themes that will drive the direction of markets and growth over the next 12 months
  • The U.S. political outlook – should investors be concerned?
  • China’s growing reliance on debt and the effectiveness of policy to drive growth
  • How much life is left in the bull market and which markets and sectors will outperform?

Plus an exciting “Brexit: Outlook and Implications” panel which will explore all aspects of the historic Brexit vote and discuss potential future outcomes and investment implications.

Among the notable guest speakers will be, Paul Volcker, General Michael Hayden, Kevin Warsh, Greg Valliere, Joaquim Levy, Albert Edwards, and Martin Fridson and many more.

Check out the full line-up of speakers and view the conference agenda here.

The conference is now 95% sold. As the conference is now less than 2 weeks away, book your place today and don’t miss out on a valuable and informative two days.


Where Is The U.S. Neutral Interest Rate Heading?

Some of the forces depressing the equilibrium real interest rate (r*) will abate.


Some factors are likely to shift from being deflationary to being inflationary. For example, weaker productivity growth in the U.S. has dragged down investment spending, reducing aggregate demand and inflation in the process. However, meagre productivity gains have also allowed the U.S. economy to reach full employment despite disappointing GDP growth. Going forward, the economy is likely to bump up against supply-side constraints if growth remains above-trend, putting upward pressure on inflation and interest rates.

Likewise, slower labor force growth has been deflationary thus far because it has reduced the incentive for firms to expand capacity, thus leading to less investment. An aging population has also increased the share of the labor force in their peak savings years – ages 30 to 50. This has raised aggregate savings relative to ex-ante investment intentions, leading to lower interest rates. However, as older workers begin to retire, overall household savings will eventually begin to decline, putting upward pressure on interest rates.

The next Insight looks at forces pulling down the neutral rate.