Time to stock up on equities, Pimco’s Kashkari says

Investors should buy equities because valuations, income growth and dividends show that the asset class is attractive, said Pacific Investment Management Co. LLC's Neel Kashkari

Investors should buy equities because valuations, income growth and dividends show that the asset class is attractive, said Pacific Investment Management Co. LLC’s Neel Kashkari.

The S&P 500’s price-earnings ratio sank to a 28-month low of 12.2 last month and then recovered to 12.5, according to data compiled by Bloomberg. The inverse of that multiple, known as the earnings yield, shows that income represents 8% of the measure’s price, or 6.1 percentage points higher than the rate on 10-year Treasuries.

That is the biggest gap since 2009.

“Equities offer returns in three different ways: Multiples can expand, earnings can grow, and through dividends,” Mr. Kashkari, the head of global equities at Pimco, said in a Bloomberg Television interview. “On all three factors, equities look very attractive.”

S&P 500 earnings are poised to reach a record $99.88 a share this year, according to the average of securities industry experts’ estimates compiled by Bloomberg, after companies beat projections for 10 straight quarters. Analysts have grown more optimistic about earnings since the S&P 500 peaked April 29, driving their forecast up from $98.73 a share.

EARNINGS GROWTH

Between April 29 and Aug. 8, the S&P 500 fell 18% on concern that Europe’s debt crisis would spread and the U.S. economy would weaken. Since then, the measure rose 3.1% through Sept. 9.

Analysts estimate companies in the gauge will see per-share earnings rise 9.2% this year, according to the Bloomberg data. The measure’s dividend yield has risen to 2.3%, from 1.9% on Dec. 31.

“Volatility is here to stay,” Mr. Kashkari said in the interview.

Investors “need to be able to stomach that volatility, but if they do and they can, we think they’ll be rewarded,” he said.

Large corporations, especially those with business in emerging markets, will have strong earnings growth potential, Mr. Kashkari said.

The Chicago Board Options Exchange Volatility Index, the benchmark measure of U.S. equity derivatives, jumped as high as 48 last month, its highest level since the bull market began in 2009 and investors sought protection from risky assets.