The outlook for US equities is a highly contested point between market participants today, with even Janet Yellen joining the fray saying: "Forward price-to-earnings ratios for equities have increased to a level well above their median of the past three decades."
We would agree, certainly on a normalised earnings basis - the US stockmarket has only been this expensive twice: 1929 and 1999.
The caveat being that equities, as the bulls would suggest, are not that expensive when one looks at the equity risk premium, ie the earnings yield versus the government bonds yield or a forward price earnings multiple.
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However, these measures perhaps miss the point that earnings are at what could be described as close to cyclical highs due to margin levels, and profitsas a percentage of the economy are at all-time highs.
As such, these metrics understate the valuation risk.
Therefore, we certainly do not forecast weak earnings, as we do not feel that we are at the end of the economic cycle.
Recession still looks to be a low probability, but we also do not see the high level of forecasted earnings - which currently stands at 10% in the US - as being easily attainable without the measures that President Trump promised being enacted.
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At this stage, tax cuts look less and less likely in 2017.
In a similar vein, we are still forecasting reasonable economic growth, but we feel that this alone is not enough to push markets much higher.
However, if economic growth does surprise on the upside, then we firmly believe that Janet Yellen and the Fed will stand ready to take away the higher growth in the form of higher interest rates.
Therefore, the US market looks set to underwhelm investors' expectations, and at these levels comes with not an insignificant amount of risk.
David Vickers is senior portfolio manager of multi-asset at Russell Investments
Bull Points
• Forecasted earnings growth of 10% in the US for 2017
• Relative to treasuries, US equities look fair value
Bear Points
• Expensive US valuations
• Low expected returns
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