The stock market has been on a rampage since late September, with a historic surge in prices for the CCA 40 and the Dow Jones, among others. However, there are many reasons for concern. In particular, business and consumer surveys “have deteriorated markedly”, observes Frédéric Rollin, investment strategy consultant at Pictet Asset Management, who expects a marked slowdown in the economy and therefore sharp downward revisions to corporate earnings.
The outlook for riskier asset classes (including equities) is darkening as interest rate hikes in the face of inflation “continue to dampen global economic growth” and increase the likelihood of a future worldwide recession, he points out. the expert. As conditions for accessing liquidity continue to tighten around the world, Pictet Asset Management maintains its underweight in equities, whose valuations “are even more difficult to justify after the recent market rebound (which it experienced in the previous nine months worst underperformance in more than a century, for a balanced portfolio between stocks and bonds, ed.). Lot of pitfalls look at the stock market. Overview.
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The European economic situation is deteriorating and is expected to deteriorate much faster than the American situation
According to household and business surveys, leading economic indicators are much worse in Europe than in the United States. “There hasn’t been such a gap on both sides of the Atlantic for almost 20 years!”, underlines Eric Galiègue, president of Valquant Expertise, for whom the economic situation risks being much more degraded in 2023 in the Old Continent than in the Uncle Sam land.
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“The European economy should deteriorate as rapidly as during the great past crises, with an expected drop of at least 1% of GDP”, warns the expert, while the big institutions have so far only forecast a certain stability of GDP. For the major Western powers, the probability of a recession is very high (60% for the United States, 80% for the United Kingdom and the Eurozone and 90% for Germany, according to Bloomberg’s recession probability forecasts).
Inflation eases, but remains historically high
In the United States, inflation has recently shown some signs of fatigue, after the marked rise in recent quarters. Indeed, both the consumer price index and the producer price index came in weaker than expected. However, the sharper-than-expected slowdown in inflation in October in the United States “was mainly due to the medical component, which recorded a historic decline of 4%,” observes independent analyst Valentin Aufrand, a member of AFATE. Furthermore, inflation, often in the double digits (such as in the UK, see graph below), remains close to 40-year highs in Europe and the US. It therefore remains historically strong.
10-year and 30-year rates have experienced a historic surge
Rising inflation, accelerated tightening of key rates by the Fed and the ECB… Long-term rates (10 and 30 years, for example) have exploded in recent quarters, both in the United States and in Europe. A very rapid surge, harmful to the confidence of households and businesses, consumption, investments and the theoretical value of shares (especially for growth and/or technological stocks, the most sensitive to the phenomenon), which are affected by unfavorable arbitrations.
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Mortgage rates in the US have risen like never before! And house prices are starting to fall. The fall is likely to be severe.
In the US, while long-term rates have soared over the past year, mortgage rates (those used to purchase real estate) have tripled over the period, thus erasing a 20-year downward trend! “Home prices, which generally remain in the clouds (although, in states like California, real estate prices have already collapsed in recent months in some cities, ed), are only starting to come down. Given the trajectory of mortgage rates, property prices are likely to fall at least 20%!” warns Eric Galiègue.
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The expected earnings of listed companies begin to decline. Beware of a significant revision of profit expectations for 2023 and 2024!
Energy shocks, household stress in the face of rising inflation and the deterioration of the economy (which portends pressure on consumption in the coming quarters), wage strains… period, and they should continue to be revised downwards in 2023 and 2024”, judges Eric Galiègue, above all because “even with the looming recession, energy prices are still quite high”.
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In Europe, wages, which have not yet increased much in countries like France due to a certain inertia related to the way companies operate, are expected to increase much more strongly in 2023 than in 2022, points out the guard Eric Galiègue. If wage increases are in themselves a support to consumption, he also raises fears that the process of downward revision of estimates of future earnings of listed companies is “only at the beginning”. The expert expects a drop of at least 20% in the earnings expectations of European and American listed companies. A phenomenon that threatens to shake up share prices…