Baltimore-based investment firm T. Rowe Price is advising investors to underweight stocks and overweight bonds for the first time since 2000.

The conservative investment company’s Asset Allocation Group acknowledged that the U.S. economy may improve under new “pro-growth policies” but elevated equity valuations fall short of adequately reflecting downside risks. This modest tactical shift provides investors with the potential to add equities in the future at attractive valuations.

T. Rowe Price’s Asset Allocation Group, headed by Sébastien Page, concluded:

- Current equity valuations appear to be pricing in a best-case growth scenario without adequately accounting for a potential downturn.

- Stocks are a critical component of investors’ portfolios, and they are strategically important in T. Rowe Price’s asset allocation portfolios, so tactical moves will be made as market dynamics shift.

- Combined with already low unemployment and stabilizing oil prices, the Trump administration’s plans to cut taxes and increase infrastructure spending suggest that the macroeconomic environment has further room to improve.

Strengthening Fundamentals

U.S. economic fundamentals are improving, according to T. Rowe Price’s Asset Allocation Group. The recent market rally, which some observers have attributed to the Republican sweep of Congress and the White House, as well as President Trump’s pro-growth policies, were aided by corporate earnings that started to improve before the November elections. In fact, U.S. earnings growth turned positive on a year-over-year basis in the third quarter of 2016 to end an earnings recession of five consecutive negative quarters.

The previous earnings recession was concentrated in the energy and materials sectors, which were hit by falling prices for oil and other commodities. A strong dollar added to the challenge. After adjusting for energy and currency effects, the Asset Allocation Group estimates that earnings for the S&P 500 Index grew by double-digit percentages in 2015 and in the mid-single-digit percentages in 2016, compared with flat unadjusted earnings growth for both years.

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Paul Dykewicz is the editorial director of Eagle Financial Publications, editor of StockInvestor.com and DividendInvestor, a columnist for Townhall and Townhall Finance, a commentator and the author of an inspirational book, “Holy Smokes! Golden Guidance from Notre Dame’s Championship Chaplain,” with a Foreword by legendary football coach Lou Holtz. Visit Paul’s website at www.holysmokesbook.com and follow him on Twitter @PaulDykewicz.