Northern Trust Strategist Declares Buybacks as America’s Financial Secret Sauce

In the world of finance, the debate around the merits of diversifying investments outside of the U.S. continues to evolve. However, according to Anwiti Bahuguna, the chief investment officer of global asset allocation at Northern Trust Asset Management, the American stock market remains the stalwart choice for investors in the next decade. Speaking with MarketWatch, Bahuguna underscored this sentiment following the release of Northern Trust’s ten-year markets outlook, which boasts an optimistic forecast for U.S. stocks.

U.S. Stocks: A Promising Forecast

Northern Trust anticipates U.S. stocks to yield a robust average return of 7.5% per year, inclusive of a predicted 2.6% dividend yield. This outlook stands in stark contrast to competitors like Vanguard, which forecasts a more conservative average return of 3.8% for U.S. equities. Over the past decade, the S&P 500 has achieved an impressive annualized return of 13.5%, as reported by FactSet.

The Strength of U.S. Capital Markets

Bahuguna attributed her confidence in U.S. stocks to several key factors. “It is hard to see any other stock component globally overtaking the U.S., in terms of strength of the capital markets we have here, in terms of the ability to manage their balance sheets, their margins,” she stated, adding, “Why would that change?” One of the pivotal arguments presented is the phenomenon of share buybacks, where the U.S. maintains a commanding position.

According to Goldman Sachs, S&P 500 and Russell 3000 companies are projected to execute a record-breaking total of $1.16 trillion in share buybacks in the current year. Bahuguna emphasized that such capital returns are not expected from international markets like China or India, and while European firms are engaging in buybacks, they lag significantly behind U.S. corporations.

Small-Caps over Large-Caps

Another intriguing aspect of Northern Trust’s outlook is Bahuguna’s preference for small-cap stocks over large-caps. She highlights that smaller companies typically benefit more from favorable economic conditions and lower interest rates, commonly found in recovering economies. “As the economy starts to recover and expand, small-cap stocks tend to rebound the most,” she noted.

Furthermore, the trend of global reshoring—where major multinational corporations refocus on domestic suppliers—positions smaller companies favorably for growth. Bahuguna also expressed her concerns regarding the concentration of the U.S. market with large technology firms. Nevertheless, she remarked that these companies offer tangible earnings now, unlike during the infamous dot-com bubble.

Quality and Diversity in Portfolios

The message from Northern Trust’s investment team is clear: prioritize quality and diversify portfolios. Their outlook suggests an anticipation of diversified annual returns from various asset classes including 6.6% for global-listed infrastructure (such as utilities), 8.4% for private credit, and 10.1% for private equity.

Key Investment Themes for the Future

Northern Trust has discerned three cornerstone themes for investors to embrace over the coming decade:

• AI-Enabled Productivity: Innovation in artificial intelligence driving growth, particularly in the U.S.
• Navigating the Energy Transition: Adapting to new energy paradigms.
• A New Realignment of Globalization: Understanding the shifts in global trade dynamics.

To support these themes, Northern Trust provides various exchange-traded funds (ETFs) such as FlexShares Global Upstream Natural Resources Index Fund (GUNR), FlexShares STOXX Global Broad Infrastructure Index Fund (NFRA), FlexShares U.S. Quality Low Volatility Index Fund (QLV), and FlexShares Quality Dividend Index Fund (QDF), all designed to facilitate investment across these identified themes.

Preparing for Volatility

As the year progresses, Bahuguna cautions about potential market volatility driven by policy changes. “At least this year, there will be a lot of noise around policy changes,” she mentioned. To navigate this uncertain environment, she emphasizes investing in diversified companies with solid balance sheets, impressive earnings potential, and low volatility.

In conclusion, Northern Trust’s bullish outlook on U.S. equities, combined with an emphasis on share buybacks and small-cap stocks, presents a compelling case for investors seeking to position themselves for potentially fruitful returns in the coming decade.