Legg Mason - Earnings Growth to Drive Returns

• The breadth of participation of stocks across different market capitalizations firmed in the fourth quarter as concerns about rising interest rates and slowing profits receded.

• Stock valuations have become more challenging as multiples have risen over the last five years. As a result, we expect that earnings growth is more likely to drive a greater proportion of returns going forward.

• While we may have been premature in our concern over rising interest rates, we still worry that the end of the Federal Reserve’s quantitative easing policies over the next year could mean a bumpy ride for all risk assets.