Equity markets – pessimism overstated

In the USA, interest rates have been rising since 2015. We are in the flattest cycle of key interest rate hikes in 50 years, but interest rates are rising. This naturally also has repercussions for medium and long-term yields which have also risen. At the same time, the US Federal Reserve is also winding back the supply of liquidity and slowly reducing its balance sheet. Financial markets and especially equity markets have long ignored this development. This phase now seems to be over. The current correction is being compounded as a result of a reassessment of business models in the technology sector. The previously anticipated profit increases are now being increasingly called into question. In addition, there are growing concerns that earnings prospects will be further reduced in response to regulation in the data area and possible restrictions on the technological oligopolies.

However, I believe that too much pessimism is now being gradually priced into markets. We are in a late phase of the business cycle, but we do not expect a recession in the USA for at least the next two years. Fed interest rates are likely to become a tangible burden on the economy from a level of just over 3%. But such a level will not be reached until the end of 2019. Corporate profits can therefore be expected to continue rising for the time being, albeit at a noticeably slower pace than in recent years. Equity markets are also likely to experience greater headwind from the valuation side as valuation models feel the negative impact of rising discount rates, falling growth rates and rising costs. On the other hand though, higher yields will enhance the attractiveness of the bond segment in the medium term, causing funds to be channeled out of the equity segment. Looking ahead, we therefore expect a steady rise in corporate earnings to continue boosting US share prices and share price dynamics to be decelerated in response to a downward trend in valuation levels. As long as the economy keeps running, equity markets will also tick over because an economic slump usually signals the end of a bull market and not rising interest rates. The equity cycle is therefore evidently not about to come to an end.


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