The USA, as well as the world, equity markets are at very important crossroads. They are heavily dependent on volatile inflation, interest rate and on earnings prospects. Geopolitical factors and Economic data heavily contribute to the instability of markets.
On the Geopolitical front the war in Ukraine and the ‘zero Covid policy’ of China affect the supply chain and inflation prospects . On the Economic side, the strength of the US economy does not allow the FED to pivot and slow down the interest rate rises. The time lags of the expansionary fiscal policy of 2020 remind us of the argument that they are are long, variable and uncertain. The economy does not cool down now sufficiently, despite spectacular interest rate rises, in order act decisively on the current primary target of reducing record inflation. There is no doubt that last year the FED underestimated the rate of inflation characterizing it temporary while it was rather entrenched and persistent.
Some Consensus numbers now :
-Earnings for the S and P are for USD 220 for 2022, USD 230 for 2023 and USD 250 for 2024
-three year inflationary expectations are about 3.0 pct
-terminal federal funds rates are at 5.25 pct or even higher.
The S and P stands today at about 4000.
With simple arithmetic we can project :
210 X 16 equals about 3350- pessimistic scenario
225 x16.5 equals about 3700 – mildly pessimistic
235 x 17.5 equals about 4100 – mildly optimistic
With the present level at 4000 we are somewhat cautious now !
During 2023 the possibility of forward earnings of usd 250
and the taming of inflation might change the overall picture creating a rosy scenario.
At present we are concerned about the P/E ratio affected by inflation and interest rates and about the effect of a possible recession on earnings and earnings growth.
However, market strategists are already rather pessimistic. This could be a positive factor in the contrarian sense.
We definitely need in order to enjoy a higher equity market good data surprises on the main effort to suppress inflation. Moreover, we need positive developments on the geopolitical issues. The interest rate and earnings projections will affect the relative valuations of the growth sector (benefiting from lower interest rates) and the value sector. Finally, we would like to mention that as always, European policy reactions are lagging behind the USA !
Wishes for good luck !