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The Federal Reserve is almost certain to lower its rates at the end of July, but do not expect a stock merger, typically marked by a strong recovery followed by a selloff, said Mark Haefele, head of global investments at UBS Global. Wealth management.
In a research note dated July 15, Haefele said the bulls on the stock market were profiting from an environment called "Goldilocks", where benchmark borrowing costs would be lowered even if the economy remained unchanged. relatively healthy, although it was slowing down in some areas.
At the end of the two days of the Federal Open Market Committee meeting on July 31, Wall Street is betting a one-quarter-point rate cut in federal funds rates, which currently range from 2.25% to 2%. , 2% at the conclusion of the Federal Open Market Committee's two-day meeting on July 31st.
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According to Haefele, investors would probably still be reluctant to put equities at a record high in a frenzied rally: high stock valuations and a poor image of second-quarter earnings.
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"We expect stocks to rise slightly in our baseline scenario, but corporate valuations and fundamentals do not predict a" merger ". Earnings growth remains moderate and multiples have only modest prospects for expansion, "wrote analyst UBS.
Here's how UBS analysts explain his thinking:
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Corporate earnings growth remains subdued – we expect S & P 500's overall earnings per share (EPS) growth of 1% to 2% in the second quarter. Corporate earnings growth stagnated this year due to several factors: difficult comparisons over the same period of the previous year, which had been spurred by tax cuts; slowing economic growth in the United States with the gradual disappearance of fiscal stimulus; weaker economic activity overseas; higher rates; and lower results for some of the largest US companies. We expect a recovery in earnings growth only in 2020. |
Current Global Price / Profit, or P / E, of the S & P 500 Index
SPX, + 0.02%
according to FactSet data, stand at 19.39 over the past year, marking the highest level of the market since around November 2018.
According to Haefele, stock market equities, which are commonly used to measure stock market values, are also historically rich: "The multiples can only increase their expansion very little. The rise in the S & P 500 since the beginning of the year is almost entirely due to higher valuations, "he wrote. "As of December 31, 2018, the term P / E was only 14.5 times, but is now 16.9 times, slightly above the five-year average of 16.5 times."
Granted, the analyst also does not plan to merge shares but asserts that the fragile state of the market helps maintain exposure to equities. has up to here seen.
In the first half of 2019, the S & P 500 gained 17.4%, the Dow Jones Industrial Average
DJIA, + 0.10%
increased by 14%, the Nasdaq Composite Index
COMP + 0.17%
gained 21% and the Russell 2000 Small Cap Index
RUT, -0.52%
advanced by 16.2%.
"On our tactical horizon of six to twelve months, we continue to overweight stocks with a selective approach by region. To further increase our exposure to equities, we would like the signs of further easing of monetary policy to be reflected in a recovery in economic forecasts and earnings growth, "he wrote.
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