The CAC 40 caused a sensation on the Paris Stock Exchange. Already beyond the psychological threshold of 7,000 points, the Parisian index has already almost eliminated, in mid-January, all its losses for 2022 (and therefore the strong negative impact of the war in Ukraine, the surge in inflation, the tightening of the ECB’s monetary policy maneuver, surge in long-term rates, etc.), with an increase of 9% from the end of December to today. While the economy is showing clear signs of exhaustion and the earnings outlook for listed companies is worrisome, such a strong upward move in French equities is surprising at first glance. The gathering of CCA 40 will it really be sustainable?
If the CAC 40 has already regained 25% since the great low of September 2022, it is above all because the trajectory of US inflation is reassuring (its ebb reduces the pressure on the Fed and the ECB, which could see a pause in their rate hike cycle) and because in Europe dark scenarios for the economy are considered much less likely than before, due to less fears on the energy front. In the immediate future, the energy savings achieved in the Old Continent, the mild temperatures of recent months, the huge gas reserves and the drop in energy prices (oil and gas) are reassuring.
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So far, stocks have benefited from investor relief on the inflation front, but “will gradually focus on the issue of the economy’s trajectory. We should expect downward revisions to listed companies’ earnings estimates if the economic situation plunges more than feared, while the consensus of financial analysts has so far continued to remain fairly confident on this front,” warns Degroof Petercam. While key economic indicators, such as the Purchasing Managers Index (PMI or ISM), are collapsing, we can currently wonder about the length and depth of the announced recession. Beware of possible unpleasant surprises!
If inflation stays under control, if the Fed and the ECB stop raising their key rates quickly enough and if the economic situation holds up better than expected, “it would be very good for equities,” says Degroof Petercam. Conversely, if the falling rate of inflation disappoints (in the event, for example, of a price/wage spiral, where wage pressures drive up selling prices… which encourage employees to ask for a further increase in wages), if the Fed and the ECB tighten the screw harder or longer than expected, and if the economy takes a stronger-than-expected plunge (with a large negative impact on the earnings outlook of listed companies) , the scenario would logically be much less rosy for the stock market…
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Why French and European stocks could continue to do well against US stocks
According to Laurent Albie, manager of Next Momentum, the outperformance of French and European equities over US equities recently can be explained by “a milder winter than expected and gas stocks at their highest (fewer fears for energy and oil and gas prices at half-auction, ed), the reopening of China (which is making luxury and car stocks soar, very well represented on the Paris and Frankfurt stock exchanges), the outperformance of the so-called value shares (those of traditionally discounted sectors, ed) via vis-à-vis growth stocks (more represented on Wall Street than on the European stock exchanges, and which have suffered in recent quarters from the surge in long-term rates, ed), or even the lower cost of European shares compared to American values.
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In this regard, it should be noted that the risk premium (additional return offered by stocks over government bonds) is much higher on French and European stocks than on US stocks, which remain expensive according to some historical indicators (such as the PER of Shiller or the relationship between corporate value and revenue).
For his part, Bank of America strategist Michael Hartnett cites reduced share buybacks (which had long been a support for prices) in the US and the loss of momentum in the dollar rally as other reasons for the phenomenon of the end of Wall Street’s outperformance against French and European equities, described as “the beginning of a new era”.
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What does technical analysis say?
From the point of view oftechnical analysis (graphic and mathematical analysis of price trends), US equities finally seem to turn their backs on 14 years of outperformance against French and European equities. Indeed, the ratio (represented by the white curve, in the chart) of the S&P 500 (US stocks) to the Stoxx Europe 600 (European stocks) has clearly exceeded the 100-week moving average (the rising blue curve, in the chart), a support very relevant and effective bottom-up, which held up for a good decade…before it was recently broken.
On the CAC 40, the trend currently remains lively (apart from the short-term overbought signals, which suggest a possible next downward correction), above all because we see a succession of ascending highs and lows, and that important horizontal resistances (6,757 points and 6,823 points -6,830 points, in particular) were overwhelmed quite clearly. We will however monitor the evolution of the Parisian peak index, accidents along the way are far from being excluded this year.
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momentumCapital’s premium investment letter and newsletter, analyzes the probable trajectory of the CAC 40 every day and helps its readers grasp the opportunity on French stocks. In recent months, our bullish and bearish expectations have mostly come true. En particulier, nous sommes repassés positifs sur le CAC 40 dès octobre dernier, avant de redevenir plus prudents fin novembre, puis à nouveau plus offensifs après le trou d’air de décembre : de très bons timings à l’achat et à la prudence, therefore…
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