Short Term Equity Price Gains Depend On Multiple Expansion

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Companies within the S&P500 have reported financial
results for quarter 2 2019 and the growth compared to last
year has been encouraging in spite of the stellar
performances of 2018. Sales has grown by 5%, earnings by
over 3% and margins rebounded to 12% even if they remain
below the 12.6% peak of quarter 3 of 2018. Home Depot
and Target were the stand out performers last week after
beating earnings estimates.
For the coming quarters,results will be compared against even higher performances of a year ago and hence earnings growth can remain soft. It is estimated that if there is no dollar appreciation and no dramatic fall in energy prices, earnings growth for this year will be close to a modest 2%. With valuations close to 25 year averages and a weaker macroeconomic environment in Europe, future gains in share prices will likely originate from an expansion of price/earnings multiples.

With this in mind, investors looked up for clues from the US
FED Chair at last week’s Jackson Hole symposium during
which it was reiterated that the central bank stands ready
to act to prolong the cycle but at the same time said it is
close to meeting its dual target of inflation and employment. There was more support from the European Central Bank which indicated a stimulus package is on its way and Germany’s Merkel also advocated for a long overdue fiscal spending program to revive the ailing economy. In Asia, the Chinese announced targeted interest
rate cuts to spur domestic consumption even if they remain
wary of real estate bubbles.

The bad news of the week was obviously the ongoing trade
tensions after China announced tariffs on USD 75 billion
worth of US goods including a 25% hike on the automobile
sector last Friday. The US retaliated with tariffs on some
USD 550 billion worth of goods.

It seems evident that the next leg up in equity markets is
now heavily reliant on stimulus measures from the ECB as
well as fiscal stimulus in Germany.

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26 August 2019

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The US Sovereign Spread Compression Is Transitory

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Risk assets benefit from de-escalation of trade tensions​​​​​​​