29 JUN, 2023
AUTORE: By Gilles Guibout, Head of European Equities at AXA Investment Managers
The market’s optimism, which has recently been fueled by quarterly results, has given way to fears of a recession. Macroeconomic data shows a deterioration in growth, although the labor market remains healthy. Central banks’ interest rate hikes have fueled concerns about a deterioration in economic activity, leading to a decline in stock indices.
While the negotiations between Republicans and Democrats on raising the debt ceiling have been the focus of many debates in the United States, it is primarily macroeconomic data that has caught the attention of investors. The deterioration in indicators of industrial activity in both Europe and the United States suggests that the tightening of financial conditions is gradually transmitting to the economy. The growth slowdown is accelerating, especially as the recovery in China appears less robust than expected.
The strong performance of services and the resilience of the labor market are not enough to reassure investors, as they are among the main reasons for the continuation of central banks’ restrictive policies. Central banks’ focus is on services inflation, the “core” inflation, which has proven stickier than expected and more difficult to eradicate. As for the labor market, apart from the distortions that have arisen post-Covid, a sort of resilience has emerged with wages continuing to grow. All this raises concerns that the long-awaited shift in central banks’ restrictive policies may ultimately be delayed.
Only the emergence of growth prospects offered by the development of Artificial Intelligence (AI), fueled, among other things, by Nvidia’s unexpected upward revision of targets, a key player in complex computing semiconductors, has allowed international stock markets to limit losses. The DJ Eurostoxx reinvested dividends, which had risen by 1.44% in April, closed down 2.51% at the end of May.
In the coming weeks, we expect the market to remain volatile, awaiting clearer indications of what the next developments will be in terms of monetary policy and the state of the economy.
First, we need to understand the potential impact of the ongoing slowdown on corporate earnings, and then we need to assess the central banks’ next decisions regarding the evolution of their monetary policy to determine what the appropriate valuation multiple should be.
At this stage, it still seems premature to anticipate an increase in valuation multiples, and the current economic slowdown leaves us cautious about the likelihood of a widespread upward revision of corporate earnings. In this context, we remain committed to our diversification strategy and continue to prioritize companies that are more likely to experience revenue and earnings growth.