The Federal Reserve last week announced the end of its program to boost the economy through the purchase of treasury and mortgage bonds. Spanning more than five years, the program injected trillions of dollars into the financial markets, helping to lower interest rates, boost the earnings-led recovery in U.S. stocks, and suppress volatility across financial markets.

We believe U.S. stocks can continue higher without bond buying by the Fed. However, the recent combination of above-average stock returns coupled with below-average volatility (adjacent chart) is unlikely to continue. Absent extraordinary stimulus, stocks are likely to experience more modest gains along with higher volatility.

The Feds change of course may also affect a stand-out aspect of the current market cycle, which is the dominance of the S&P 500 versus most other asset classes. Over the past three years, the 19.8% annualized return for the S&P 500 towers above the 9.7% return on foreign developed stocks and 0.7% return for emerging markets. Even so, valuations for foreign stocks appear increasingly attractive relative to the U.S. For this reason, we continue to recommend that investors maintain broad diversification beyond U.S. large cap stocks.