Despite the first-quarter GDP decline, earnings trends in the U.S. have been positive, signaling that price-earnings ratios could be headed downwards.

Forward P/E ratio on the S&P 500 Index is 16, in line with its 15-year average, so stocks are no longer cheap, according to a report by QMA.

“I’ve been optimistic about economic growth now since the middle of last year when we wrote a piece predicting rapid GDP acceleration,” Ed Keon, managing director and portfolio manager at QMA, told Markets Media. “Obviously the first quarter was a step back, largely due to the weather, but I think the numbers in the second half of last year and in the second quarter this year are largely supportive of a notion that growth is accelerating.”

QMA, an asset management subsidiary of Prudential Investment Management that manages $114 billion, recently scaled back its equity overweight and reduced its underweight in fixed income. While it still expects stocks to end the year higher than current levels, they could be vulnerable to a correction near-term, due to unsustainably low volatility and rising geopolitical risks.

It’s also moved from underweight to neutral in emerging markets. “In emerging markets, we’ve become a bit more optimistic over the course of this year,” Keon said. “Early in the year, I took a lot of ribbing suggesting I had an itchy trigger finger on emerging markets since the beginning of 2014. We did eventually upgrade emerging markets from underweight position to neutral and some of the funds that I manage have now moved to aggressive overweight in emerging markets.”

From an investing point of view, the United States has premium price-earnings ratios. “The United States is like a high quality growth stock, Europe is a value stock and the emerging markets are a little of both, where you have reasonable valuations but also greater risk,” Keon said.

Five years after the ‘Great Recession’, the global economy finally seems to be righting itself. “It seems as though the world is moving on to a little bit more normal environment, although we still have very aggressive central bank policies, weak employment, low growth in Europe and geopolitical risk,” said Keon. “But I think we’re starting to get closer to what we used to think of as normal.”

The fact that the recession was brought on by instability in the financial system has impeded recovery, according to Keon, citing research by the IMF and others. “Ordinarily, after a recession of that magnitude you get solid bounce back and you get much higher growth,” he said. “On the other hand, we had a financial crisis and the damage done to the financial system means that credit expansion, which normally bounces back in a recovery, remains constrained.”

That’s more or less what’s happened: 2% growth on the average for the last five years, which is far below the 3%, 4% seen in prior snap-backs from deep recession in the United States but still consistent with the research.

Keon continues to be overweight risky assets. “That positioning has worked out pretty well. I still think that the stocks are going to do better than bonds, and taking a risk in a portfolio is still a pretty good place to be over this year and into the next.”

Feature image via Thep Urai/Dollar Photo Club