Interest rate fantasy on the stock market exaggerated

The hope of a key interest rate cut by the US Federal Reserve at the end of July drove the US stock markets to new highs. The S&P 500 recently broke through the 3,000 point barrier and the Dow Jones crossed the 27,000 point line for the first time.

Basically, lower interest rates are good for the equity markets, as they both promote economic activity and increase the relative attractiveness of equities over bonds. Long-term historical data show that the US equity market recorded a positive average stock price performance and an increase in the valuation level in the months following the first rate cut. However, the last two turning points in 2000 and 2007 paint a different picture. These data suggest that if the peak in corporate earnings has already been reached in the economic cycle, lower interest rates will no longer drive the equity markets in the longer term.

We are currently already in a late phase of the economic cycle and the risks to further economic development have risen significantly in recent months. The earnings momentum of US companies is already very weak and the burdens are leading to an increasing number of profit warnings. Therefore, the forthcoming rate cut should have the potential to increase the valuation of the stock markets again in the short term, but the best should already be behind us.

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