Military tensions, US elections, election results… is it time to go public? | Financial markets
The stock markets are back in these October days to catch the stock market saying, “collecting pennies before the skating rink.” This expression, attributed to financial researcher and mathematician Nassim Taleb, describes the risk of large losses (“steamroller”) in exchange for small profits (pennies). An escalation of war in the Middle East, a very close US election, rising oil prices, weak Chinese growth, or a change in the pace of US interest rate cuts look like threats. to equity markets, which have already achieved strong growth this year.
The Ibex 35 in the Spanish market is up 16%, the Euro Stoxx 50 is up 11%, and in the United States, the Nasdaq and S&P 500 indices are over 22% year over year. Is it worth it then to collect the pennies that are left before the skating rink until the end of the year, or to close the bet on investing in shares now? The start of third-quarter earnings season this Friday may help answer that question.
One of the more controversial aspects of recent days has been the slowdown in the pace of expected US interest rate cuts, following strong employment data last week and last Thursday’s report of persistent inflation, down just a tenth. in interannual terms up to 2.4%. This brake on the decline in the price of money by the Federal Reserve should not infect Europe, which has a much weaker economy. But for now, US 10-year bonds are back above 4% after hitting a low of 3.61% in mid-October, before the Fed cut rates by half a point.
“While all the negative elements may play a role and hamper the stock markets, I believe the scenario for stocks is not negative. Companies’ performance will benefit from a better-than-expected macroeconomic scenario as they avoid a recession and enter a soft landing,” explains Juan José Fernandez-Figares, investment director at Link Securities. And he adds: “While it is possible that there may be specific declines in equity markets, I believe that we should maintain a certain exposure to equities in accordance with the risk profile of each investor.”
One of the key questions analysts have been consulting on is whether shares are expensive or cheap amid the prevailing uncertainty, and this is where the release of the results will help. Thus, Ignasi Viladesau, investment director at MyInvestor, attributes half of this year’s stock market growth to increased sales and improved business profitability. The other half responds to expanding multiples. “Valuations are challenging now, but if we look at the two-year horizon, we see that there is confidence that corporate profits will live up to these estimates: they are expected to grow by 12.9% in 2025 and 9.8% in 2026 year, according to Bloomberg consensus. for the MSCI ACWI World Index. These expectations leave PER (the time that price contains earnings per share) below 18 times, although still above the historical average of about 15.5 times,” he concludes.
Valuations remain high in the US, but not in all sectors.
Luca Paolini, chief strategist at Pictet AM, notes in this regard that “although shares remain expensive, they are not in bubble territory. Technically, there is a possibility that the stock market, given the favorable seasonality of the last months of the year, will remain stable until the end of 2024. Overall, we have tactically increased exposure to riskier asset classes by overpricing equities,” he explains. .
Manager Schroders is asked about the scarcity of the US market. Simon Webber, head of global equities, said valuations in the US market look weaker when looking beyond the mega-cap tech stocks that are pushing up the overall S&P 500 P/E ratio: “Market consensus expects earnings growth to accelerate.” . for the broader market and a significant slowdown in growth rates for large technology companies.” And he adds: “There are also reasons for increasing stock market returns at the regional level. “European economies will be more sensitive to interest rate cuts than the US economy, and in Japan real wages have turned positive after months of contraction,” he concludes.
And the results for the third quarter of the year, which began to be published this Friday in the United States, will be decisive in whether to exit the stock market. Stephen Auth, director of equity investments at Federated Hermes, believes that “we will wait to see whether the improvement in earnings growth outside the technology sector that we have been waiting for begins to show signs of life in the third quarter.” is happening. We are optimistic. Overall, we believe the next earnings season will be positive for the market, albeit unevenly,” he concludes.
The results of the third quarter will serve as a guideline for maintaining positions in the stock market.
And the discourse is not changing much in Europe, despite the absence of these large technology centers. In Europe, Michel Bourgon, head of equity portfolio at CA Indosuez, notes that after a season of mediocre publications and low visibility in the second half of the year, earnings per share (EPS) growth forecasts for 2024 are weak for many companies. revised downward. However, the European market remains relatively attractive from a valuation perspective, especially the SME segment, which should also benefit from lower interest rates,” he points out.
Sector rotation in the stock market becomes a talisman that will allow stocks to continue to rise. According to Mario Montagnani, senior investment strategist at asset manager Vontobel, the process has already begun. “The key difference is the strong sector and style rotation from mid-July 2024, which favors defensive sectors such as healthcare, consumer staples and utilities. Before this, almost 80% of global profitability came from just two sectors: technology and communications services, driven by companies related to artificial intelligence,” he points out.
Weight in fixed income
While fixed income is not immune to the uncertainty that threatens financial markets, it provides a greater opportunity to serve as a safe haven if those alarm bells sound. Chris Iggo, CIO of AXA IM Core, notes that “all the risks that the market is currently focusing on suggest that the bond bet will continue. Volatility is rising, although the macroeconomic context of a soft landing appears safer. This will open up potential investment opportunities as prices fluctuate between strong fundamentals and high levels of uncertainty. Focusing on earnings and quality seems like a smart theme to invest in later in the year,” he says.
Bond volatility was evident in the early days of October with yields rising in both Europe and the US, with prices falling correspondingly. A guaranteed level of 3% on Spanish 10-year bonds or 4% on US bonds in the midst of central bank rate cuts is very interesting for analysts. Juan Juan José Fernandez-Figares explains that while fixed income has been under pressure for a few days now, it is a fairly interesting medium-term alternative as rates should continue to fall, although probably less than many investors expect. the range of these assets will be more limited than originally thought. However, at current rate levels and maturities, these assets remain an attractive investment option,” he concludes.
In general, experts rely on high-quality government and corporate bonds. If the economy was causing panic, the riskiest assets such as high profitability (high yield) will fall sharply with the outflow of money from these assets. Chief strategist Pictet counters US bonds: “The possibility of a soft landing in the US makes the pace of market-discounted monetary easing too intense, and we are neutral on this Treasury debt. Demand for its debt from foreign investors remains high, but we would like to provide more clarity regarding the election results,” he concludes.
Managers and analysts don’t see a scenario that would force them to exit the stock market at the end of the year. The high returns achieved and the many unknowns surrounding the economy and markets do require greater caution. Price volatility is intended not to spoil a year that has once again been very generous for those taking risk in equities.