Beata Manthey (Citi): “There is no bubble in AI, it drives stocks, but also profits” | Financial markets

Beata Manthey, chief European equity strategist at Citi, says she is surprised by the speed at which stock indexes are breaking through and setting new highs in 2024. This moment also inspires more optimism than the apocalypse: Nvidia presented the results and again caused euphoria in the market. . Manthey, however, believes that such euphoria is not based on castles in the air, as in other times: AI stock prices are going through the roof, but so are their profits, he notes.

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Beata Manthey, chief European equity strategist at Citi, says she is surprised by the speed at which stock indexes are breaking through and setting new highs in 2024. This moment also inspires more optimism than the apocalypse: Nvidia presented the results and again caused euphoria in the market. . Manthey, however, believes that such euphoria is not based on castles in the air, as in other times: AI stock prices are going through the roof, but so are their profits, he notes.

2023 was an impressive year for the stock market. Is there a risk of overvaluation?

I would say overrated is too strong a word. We were pretty bullish on the stock last year, so things turned out as we expected. This year, if you look at valuations, some markets are overvalued, but I wouldn’t say they’re overvalued. I wouldn’t use that word. It is true that the United States is especially expensive. And global equities, which of course are heavily influenced by the US, which represents 70% of the global market, are trading just above their long-term average. The market is not cheap, but whether this is right or wrong will depend on how the results unfold.

Were you surprised by the highs in the S&P 500 and some European stock markets?

This was in our forecast for this year, but the market moved very quickly. The Stoxx 600 is trading (prior to Thursday’s open) at just 3-4% of my target price. When I installed it in November, I was as optimistic as possible, and then others joined me. My American colleagues are also moving towards the upper limit of the S&P expectation range, at around 5100 points (currently around this figure). This gives an idea of ​​how quickly the market has developed.

Artificial intelligence is also developing very quickly. Do you think the grades are justified?

AI is boosting stock prices as well as corporate profits. Let’s not forget the basics. The US earnings season has been impressive so far. For these big names in AI, analyst expectations are very high and market expectations are even higher, but even so, the companies managed to achieve them. This industry will continue to evolve for many years to come and we as investors don’t want to miss out. I don’t think anyone thinks this is a fad that we’ll forget about by next year. It will just develop and become bigger.

It’s an election year in the US, and that usually means good news for the stock market.

This is another factor. Half the world’s population will vote in elections this year (there are elections in Europe and India, among others), but, of course, everyone will be paying attention to the United States. there is some volatility during the election period, some uncertainty, but that will be as the date approaches. The problem is that we still know little about what specific policies the candidates are proposing. What will Trump do if he wins? Our strategists estimate that the dollar will grow by 5%. A worrying issue for European equities could be the introduction of new tariffs, but the election needs to be seen in a macro context and the US economy continues to thrive despite expectations of a slowdown, although our forecasts call for a mild recession going forward. in the middle of the year.

What about Europe?

Regarding the European market, the expectations with which we started the year were very low. This means that even if there is some pressure on earnings per share, this has already been factored into European prices. The market is more optimistic about earnings per share than other major regions, so if the economy eventually becomes more resilient or begins to improve, it could be a positive surprise.

Will geopolitics have an impact?

We have a geopolitical risk premium index, which, because we’ve had so much tension in the last two years, is already quite high. This means that many geopolitical risks have already been priced into the markets, although this is difficult to see because they are doing well. Of all the stock markets, it is the Chinese one that has already taken into account the greatest number of geopolitical dangers. And among developed markets, Europe stands out. This is one of the reasons why the country is so cheap compared to the US.

It looks like the rate cuts will not happen as quickly as expected.

A year ago, we believed that rising interest rates and expectations of lower rates would move markets. The focus now is on its consequences. To see if high rates are causing any negative effects on economies around the world, especially in the United States, as well as on corporate profits. We have always believed that the market was a bit hasty with so many rate cuts. In our opinion, there will be five of them this year. The risk is that the economy strengthens and inflation begins to rise, although for now the market has decided that a stronger economy is enough to continue growing against the risk of higher rates for a long time.

Which industries and regions can perform better in the stock market?

In Europe we like technology and luxury goods. And due to the risks of increased volatility, we have increased our defensive posture in the healthcare sector. We are overweight continental Europe. We’ve noticed something very interesting in Europe: when a company exceeds expectations, the rewards are much higher in price than we’re used to seeing historically. And they don’t punish you as much for failure. This tells me that market expectations were so low that it didn’t take much to meet them.

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