This year the DAX has lost eleven per cent, whereas the S&P 500 has risen by five per cent. A similarly great discrepancy between prices on the bellwether equity indices in Germany and the USA was last seen in 2002 and 2011. But this year’s poorer price performance is not only to be seen in the DAX, but also in all other major European share indices. The price losses range from minus five per cent (France) to minus twelve per cent (Italy). Prices have also come down significantly this year in China and the emerging markets.
To put it the other way round: Only the US share indices are in positive terrain in 2018. We have pointed out the reason for the good performance in the US markets several times here. This is (in a nutshell): A good sector trend in the key US technology, banking and petroleum sectors is driving profits. In addition, the broad US market has also been driven this year by the Trump Administration’s tax cuts, which have brought the equity markets an above-average increase in profits. Neither this strong fiscal stimulus nor the high quality of individual stocks is currently to be found in Europe, which is why the gap between equity markets on this side of the Atlantic and in the USA is widening.
The steep fall in share price performance in Europe (and in the DAX) is, however, not rooted exclusively in the USA. Many companies here have also brought disappointments. This is reflected in the development of the analysts’ profit expectations, which have clearly not been met.
Example DAX: At the beginning of the year equity analysts assumed that the profits of the 30 DAX companies would rise by around ten per cent in 2018. The positive outlook of strongly rising corporate profits also formed the basis for our DAX forecast of December last year, in which we expected the German bellwether index to have reached 14,000 points at the end of 2018, which was far too high. These earnings forecasts have turned out to be much too optimistic. The many political conflicts, the extent of which took us by surprise and which were fuelled especially by US President Trump, have made a significant expansion in corporate profits impossible within Europe. Indeed, so far the DAX companies have not been able to report any increases in earnings, but only stagnating profits. However, a glance at the table below shows that profits have been negatively impacted not only by macroeconomic and political factors, but also by a large number of factors specific to certain sectors and/or companies (e.g. Deutsche Bank, Deutsche Post, ThyssenKrupp).
Looking at the forthcoming figures for the third and fourth quarters, the earnings forecasts could now possibly even drift into negative territory. This is due to – among other things – the fact that the reciprocal penal tariffs imposed by the USA and China have only been in force since July 2018 – i.e. they have not yet been reflected in the quarterly figures.
However, for the equity markets we remain positive as regards 2019, partly because important key variables such as a robust economy and a favourable equity market valuation continue to have a positive effect, and partly because the latest correction on the equity markets appears to have been overdone on the downside.